DSO is a key finance metric for any business and is an indicator of how well your business is getting paid by your customers once the hard work of selling to them in the first place is done. DSO is the number of days of credit outstanding at any given time and can be measured quarterly, monthly, weekly or even daily. A company with a DSO of 45 days against its standard payment terms of 30 days is operating at 15 days ‘excess DSO’ and this will be impacting it’s cashflow and opportunity investment negatively.

Take a company with £20 million pounds annual credit sales with 15 days excess DSO. Daily credit sales would be around £55,000 X 15 Days = £825,000 excess receivables investment or money trapped in receivables. If you assume interest at say 3-4% then an additional £30K of annual interest is being paid or not earning interest through cash not being collected and allocated on time.

If this same company managed to reduce its excess DSO by say 5 days then it would improve its annual excess receivables and interest payment, therefore cash-flow, by around £280K.

There are typically 3 key functions of a credit management team that need to be working well, and in harmony, to improve DSO metrics

Allocations – If a company has already paid you but you don’t know what for then that payment cannot be matched to an invoice and will not be acknowledged on the ledger. As far as your accounting system is concerned there is still a debt to pay and the payment is outstanding. Credit controllers will chase customers who have already paid which impacts customer relations and during pressure times (month end) they may be re-assigned to cash allocation thereby impacting time spent on collections and chasing payments.

Billings – Payment terms and therefore DSO start date is based on the date of invoice. For many customers, however, this is re-interpreted as date of receipt of invoice. Days and weeks can be lost between these date’s, so companies need to focus on getting invoices out on time and more importantly delivered and received on time. Moving customers from post to e-mail/PDF to electronic delivery via portal and ultimately EDI can minimise the impact of a poor billings process on the DSO metric. Your electronic delivery customers can receive invoices faster and your credit team has a time stamp of when the customer received the invoice. Queries and dispute management can also be built into the billings process

Collections – A solid collections process begins before the payment is due. Chasing payments is an art and a science and requires a structured process of customer contact from soft, medium and hard reminders that a payment is due and now overdue as well as recourse to legal action in the worst cases. Collections teams need to adopt a variety of collection methods from electronic to post as well as direct call contact later in the collections stage. Dunning’s letters and calls are key to the process as well as an efficient disputes and resolutions toolkit.

Different companies have different problems and perspectives with each of the ABC elements of credit management. Some see it as a Collections issue, others as Allocation, while others focus on excellence in Billings. Solving the excess DSO problem may require all three working well over time.

There are three ways to improve your ABC performance. Automate, Automate, Automate.

AAA – Automate, Automate, Automate. There are a number of specialised and full suite solutions on the market today that can improve one or all of your ABC elements. They are easy to integrate, fast to implement and cost effective and can pay for themselves within the first year of operation. Full suite solutions can enable you to say start with one (Billings) and add others later (Collections/Allocations). Automating all three will drive the best level of DSO metric performance.

If you would like to find out more about the problems that the Finance Department are facing when it comes to progressing its I2C processes, then simply download our Guide on Taking Control of the Invoice-to-cash process.

 

ABOUT THE AUTHOR

Andy Bass is the New Business Development Director for Corrivo, a new market leading invoice-to-cash software SaaS solution developed by Data Interconnect who have over 20 years of experience in this space. Andy has held very senior executive positions within the technology and SaaS sector and has first-hand experience of having to deliver against cash collection objectives in complex business environments.

 

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