How to effectively improve your Days Sales Outstanding?

Among the top priorities of companies, the most important ones are to close deals and to keep customers happy. But do these always render healthy finance?  

Ultimately, isn’t it cash that powers businesses? Even though most enterprises acknowledge this fact, few prioritize competent cash collection. According to a recent study on late payments by Dun and Bradstreet, on average, around 50% of invoices are still paid late in the US, with notable differences between the various sectors. This is a substantial area of concern for business owners. Cash collection is an essential step in the order-to-cash cycle and is paramount in establishing business growth. After all, what is the context of making a sale if you do not receive payments promptly for it? 

Having efficient accounts receivable management can play a significant role in organizing the enterprise’s cash flow. The right analytics can benefit in improving AR (Accounts Receivable) performance. 

One decisive metric that gives a good glimpse of the Accounts Receivable performance is Day Sales Outstanding or DSO. In this blog, let us understand more about Days Sales Outstanding and how to effectively improve it. 

What exactly is Days Sales Outstanding (DSO)?

Day Sales Outstanding measures the average number of days a company takes to collect payment for a sale. It is determined on a monthly or quarterly, or annual basis. Also referred to as days receivables or average collection period, DSO is a primary element of the cash conversion cycle.  

Some key points regarding DSO: 

• DSO is the average number of days it takes for a company to receive payment for a sale. 
• A high DSO number indicates that a company takes a long time to collect customer payments. It can impact the cash flow and liquidity. 
• A low DSO number indicates that the company is collecting payments speedily from its customers, which is ideal. That money can be utilized back into the business to good effect. 
• In general, a DSO under 45 days is counted as low. 
• DSO calculator: DSO = Accounts Receivable/ Total credit sales x number of days 

Applying Days Sales Outstanding

An important metric in the accounts receivable (AR) processes, DSO can be analyzed in a wide range of ways. 

It can suggest the efficiency of the accounts receivable or collections department. Further, it indicates the extent to which the business maintains customer satisfaction. In addition to this, DSO helps in the identification of customers who are not creditworthy. 

The Days Sales Outstanding value for an enterprise, even for a single period, provides a reliable benchmark for assessing the enterprise’s cash flow. Nonetheless, the trends in DSO over time are helpful. Trends can indicate an early warning sign of trouble. 

When the DSO rises, it is a warning sign that something is going wrong. It may hint at declining customer satisfaction or the sales team offering longer payment terms just to boost sales. What about when the enterprise allows customers with poor credit to make purchases on credit? This steep increase in DSO can have severe implications for cash flow and hamper the enterprise’s ability to make on-time payments. Observing a company’s DSO over time helps determine whether its DSO is trending up or down or whether there are any patterns in the cash flow history. Again, DSO is not the only metric that indicates a company’s accounts receivable efficiency. When considered with other metrics such as Delinquent days sales outstanding (DDSO), it can indicate the AR competency well. 

5 ways to improve the DSO and cash flow

Improving the DSO requires reducing it, which should be the priority in any business. You mitigate the risks of running into cash flow problems by reducing it. However, working capital metrics such as DSO and DPO (Days Payable Outstanding) provide little insight into how you can enhance the cash flow. As a result, traditional working capital strategies are limited when it comes to negotiating customer payment terms or even supplier payment terms. 

 Let us look at the following questions here related to customer payments which can shed some light on the collection processes: 

• “Do your customers find it convenient to make payments to you?” 

• “Have you developed a strategy to ensure that you remain ahead in your collection procedures?” 

• “What are the other KPIs that impact your Days Sales Outstanding?” 

From these questions, we can conclude that an efficient Accounts Receivable process is imperative for improving the DSO. Some of the solutions that improve DSO are as follows: 

Payment reminders 

Timely payment reminders for the team to follow through on the invoices, such as sending invoices promptly, follow-up emails, and more, will consistently support the process. This function involves repetitive processing, and (intelligent) automation can come to the rescue in taking off the burden. 

Optimize the billing processes

The billing process is crucial for lowering the DSO and augmenting the cash flow. Ensuring that the customers receive the correct information at the correct time is a prerequisite for timely payment. 

The information that should be there on the invoices and payment reminders are: 

• Invoice number 
• The amount and consequent late payment fees 
• Invoice due date (and also the number of days it has been due) 
• Name of the company and contact information 
• Payment terms 
• Payment options (multiple payment options can be encouraged) 

Having a payment reminder strategy in place

Sending out timely payment reminders with the help of a payment reminder calendar or plan and depending on the payment terms is paramount. Depending on the customer subgroups, you can pre-design various email workflows. Subgroups can be based on corporate/ SMB companies, Payment modes- by card/by transfer/etc., new customers/established customers, new late payers/ frequent late payers, and more. Automation can tackle this area as well. 

Reviewing the payment terms to reduce DSO

• Reviewing the present credit policy and terms can help in reducing the DSO. For instance, reviewing this policy will be beneficial if you have a 90-day interest-free payment option, but again your DSO is higher than what you want.
• Different clients have different terms which may not be generalized. You can negotiate that on a case-to-case basis.
• You can incentivize early payment.
• Payment reminders can remind late payers about the payments. Also, encouraging them to automate the payment in case it is subscription-based can help.
• Having a clear communication channel with the customers, automation and personalized emails, and efficient AR process management is an absolute game changer.

KPIs beyond DSO

The other KPIs attribute to the AR process management as well. Collection Effectiveness Index (CEI), AR aging reports, and billing cohorts to monitor the collection processes’ evolution over time are some metrics you can track for improving the DSO. 

How to effectively lower the Days Sales Outstanding?

With the help of automation, you can automate not only the time-consuming and tedious tasks but with AI-powered digital workers such as Tara; you can also automate end-to-end processing. From following up with individual clients, tracking the KPIs effectively, sending email reminders – not just automated but personalized ones, facilitating invoices, and internal reminders, automating the collection workflows, and tracking the DSO metrics, intelligent automation solutions are the answer. 

With the help of an AI-led digital worker, you can automate your entire AR processes. Subsequently, the benefits will be getting faster payments, boosting your cash flow, lowering the DSO, reducing the operational cost of collection, and ultimately having valuable time to devote to long-term growth, which is every CFO’s aspiration. 

Tara, the AR Specialist- Digital worker

Let us look at Tara, the Accounts Receivable specialist, and a digital worker. From managing the entire AR process – credit management to invoicing to reconciliation, Tara can augment the entire process and improve the DSO effectively. Her responsibilities include: 

• Receiving and authenticating all the bank wires. 
• Maintaining the audit databases and spreadsheets and updating information whenever required.      
• Corresponding with customers and clients to request payment and arrange payment plans.       
• Collecting payments from the customers and records in the system accurately.  
• Analyze and produce reports documenting overall profits and losses. 
• Updating clients’ accounts based on payments/contact information.  
• She can instantly connect to the financial systems of record.  
• Collect and normalize forecast inputs across all the systems.  

The benefits of having a digital worker such as Tara is manifold. Artificial Intelligence-powered Tara has complete domain knowledge, can be easily integrated, and does not require platform licensing costs. She starts generating visible ROI (Return on Investment) from day one and actively learns. 

Takeaway

Your DSO can indeed make or break your business. To improve the DSO, you need to access the entire accounts receivable process as a whole. The best way to augment the process and reduce DSO would be automation and having an AI-powered digital worker such as Tara. Saxon’s Digital Clerx is just the precise, innovative solution that answers your finance and accounting roles. You can schedule a free trial to experience it.