Abbreviated to DSO, days sales outstanding refers to the amount of time or the number of days it takes for a company to convert its account receivables into cash flow. Measuring your average collection cycle and assessing the management of cash flow is imperative for any organization, large or small, because having a high DSO directly impacts your bottom line.
DSO and cash management is not entirely up to one department. There are multiple teams that play their individual roles when it comes to measuring the DSO metric. To help reduce days sales outstanding and streamline better cash flow management, we’ve outlined our top 5 tips to create a more efficient cash flow process for your business.
1. Calculate Your Current DSO
According to Investopedia, DSO is calculated by dividing the average accounts receivable during a given period by the total value of credit sales during the same period and multiplying the result by the number of days in the period being measured.
To better understand where you plan to improve, you have to establish your starting point. Begin by finalizing your current DSO and start comparing it against your industry benchmarks and competitor insights. How do you compare? By meticulously collecting the data, accounting and finance assets can then present their findings to senior management to make the case for a solution to solve high DSO and improve cash flow.
2. Customer Credit Approvals
DSO is often driven by your customers’ ability to pay their invoices on time. Therefore, any effort to improve DSO must address customer credit risk. Based on this criteria, you are then able to determine the financial viability of your customers.
The customer approval process can also be analyzed in order to find areas to lower DSO and improve cash flow management. Do you have a procedure in place for updating credit information on a regular basis? Are you performing credit evaluations on all new customers? Identifying these answers will help get more qualified customers through your door and allow sales representatives to measure the criteria effectively when pursuing prospective customers.
3. Create Strict Invoicing Management
Are your invoices accurate and sent out on time? Slow or inefficient accounting processes can extend DSO. Therefore, improving DSO often starts at a granular level when reviewing all outgoing invoices. Staying detail oriented in this area can help make sure invoices are sent on time, they contain all necessary information and do not have any errors. Incorrect charges, invoices that do not reflect agreed-upon information, or the wrong mailing address are just a few examples of common errors that can delay payments.
4. Invest in Credit and Collection Management Software
Credit and collection software allows businesses of all sizes to view, store, and act upon centralized data to streamline their collection processes. Instead of relying on manual processes, this software accelerates collections management through automated workflows and customer correspondences. This helps decrease DSO by keeping your credit analysts organized and your data secure and all in one place. Implementing credit and collections software for your business can improve productivity by 10x and save your team an average of 60% of their time.
5. Develop a Accounts Receivable Strategy
What is your current plan to follow up with unpaid invoices and outstanding customer balances? What is your review process for aging reports? Do you have an understanding as to why customers are paying late (e.g., invoice discrepancies, product issues, etc.)? Your strategy to tackle these questions should be an increased focus on customer communication. Reach out to your accounts to determine the next course of action for invoices to be completed. Problem-solve with your customers to help determine a viable solution and carry that data in an organized accounts receivable reporting dashboard.
Companies on a mission to reduce DSO and improve cash flow management must stay committed to maintaining all the above processes. Disorganization and manual processes can lead to human errors that impact your DSO, cash flow management, and overall revenue for your organization.
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