January 23, 2021
DSO (Days Sales Outstanding) refers to the measure of the average number of days it takes a company to collect payment after a sale has been made. Typically, many cash flow problems can be directly attributed to having a high average DSO. In subscription based payment systems, having cash on hand is critical. The lower the DSO, the faster you have access to the funding (should you need it) to keep your process running smoothly. Here are a few tips on how to decrease the average Days Sales Outstanding, and maximize the efficiency of your business processes.
Clients who continuously make late payments (or refuse to make them at all) can cause your accounting team massive headaches. Performing credit checks on all of your customers (when possible) can save your business from a world of pain and collections claims. Unfortunately, not everyone has the ability, or discipline to maintain a timely payment schedule; and it's vital that you try your best to identify potential "problem clients" before they have the chance to become one. Your DSO will most likely improve significantly once you establish a reliable customer base. Think of credit checks as preventative care for the future health of your company's cash flow (and your accounting staff).
Late Payment Penalties
One of the most motivating factors that encourages on-time payments is implementing a late fee policy in your Terms & Conditions agreement. Companies that charge a fee for late payments report substantial improvement in their Days Sales Outstanding on average. However, be sure to select a fee amount that is not so trivial that it is easily ignored, but also not so large that it causes customers to become unhappy or feel "cheated"- as maintaining positive customer relationships is crucial for businesses of any kind. Also ensure that your late-fee policy is clearly stated and reiterated in as many ways as possible to ensure the image of transparency and honesty within your business practices. Also, consider offering incentives for those clients that do pay on time often; such as an occasional discount on a payment, or a "Thank-You" letter reminding them that you appreciate their consistency. Personal, positive interaction has proven to be one of the best ways to build rapport with customers and establish brand loyalty.
Consistent Payment Reminders
Often times your client's reason for paying late is not negligence or malicious intent, but that they simply forgot. People's lives get busy and things fall through the cracks, we get it! Unfortunately for businesses, as understanding as you may wish to be, those little slips of the memory can have a dramatic effect on your DSO. Setting up methods for your staff or accounting system to remind clients of their invoice due dates can help improve this issue substantially. It is also important to ensure that those reminders are sent at the same time each invoice period, as consistency can often encourage learning and memory retention. That means that eventually, some clients will become so used to receiving the reminder notices at a specific time, that they will begin to anticipate them, or remember on their own (and sometimes even complete payments early!). However, try to avoid personalized reminder phone calls and emails. When it comes to money, a depersonalized or automated approach often comes across as more helpful, and non-abrasive than other traditional reminder methods.
Multiple Payment Options
Offering your customers as many payment methods as possible will make payments easier, and in turn will encourage invoices to be paid on time more often. Lets face it, there is no one payment method that works best for everyone! Some clients may prefer checks or cash payments, while other favor Credit or Debit options. Limiting your payment options to just one or two types also limits your customers accessibility to funding, or makes payments a hassle. Also consider offering more modern, automated payment options; such as PayPal, Venmo or CashApp. Convenience is key to many clients in today’s fast paced lifestyle; and failing to acknowledge this could cause you to fall behind. Millions of people around the world today utilize and favor these payment platforms over others, and the added convenience of having those preferred options available can have nothing but a positive impact.
Automate Your Billing Process
Automating anything and everything you can within your business or accounting process saves you time and money spent on unnecessary manual labor. Many large Days Sales Outstanding averages can be attributed to a stunted or defective overall quote-to-cash process. Ensuring that invoices are paid on time is extremely important, however it is not the only important aspect of the business process that can help lead to a decrease your average DSO. Basic forms of accounts receivable software can assist by sending invoices and reminder emails automatically, but more advanced AR solution software such as Armatic also offer features that speed up the overall Quote-to-Cash process, so you can reduce your DSO and receive your cash more efficiently. Features such as e-signing for important documents, payment options within invoice reminders, data reporting & analytics functionality, QuickBooks compatibility, and even customization tools for the individual needs of your clients can all be found within the Armatic software. Modernizing your business makes yours, and your customer's lives significantly easier (and gets you paid on time).
Implementing just one or two of these tips can help improve your average DSO, but utilizing a solution that incorporates most, or even all of them in the most efficient way possible will have a much more substantial effect. Ensure that the solution you choose effectively serves as many purposes as possible in order to minimize costs, and maximize DSO reducing potential.
BY Casey Griswold
BY Alyssa LeBlanc
BY Max Golovnia
Alyssa is handling content development and content planning for Armatic and works closely with our product and development team.