Why is DSO important to your CFO and Investors?
CFOs care because investors do. Stock market analysts and investors are interested in DSO (Days Sales Outstanding) figures. They see DSO as a sign of how well the company is managing its credit in order to fuel its own growth. CFOs monitor it and are measured on how well they control those metrics. So what is a high DSO figure?
Expectations of what number represents a high or low DSO vary by industry. Put another way, investors and analysts benchmark a company’s performance against their industry peers, and for good reasons. Faced with two similar companies in an attractive sector, the firm with a low DSO could be assumed to be managing credit well: it has tight reins on its business and shows no signs of wastefulness or poor management.
Of course, DSO taken alone can be misleading, but you can see why it is a temperature check on the company’s financial health.
So how can businesses improve their DSO?
Here are the top four strategies for improving DSO according to one of our large clients with a market capitalisation of USD 1.85 billion:
- Selecting the right customers
- Optimising accounts receivable processes
- Reducing credit terms
- Tracking and tackling aged debt
Selecting the right customers
In Winters past, rail companies often cited the wrong type of leaves on the train lines as the reason for widespread delays or the wrong kind of snow. Rail companies can’t control the weather, but they can have thorough contingency plans. Credit managers, on the hand, are in charge of the credit checking process that goes on before a new account is taken on, and they can analyse their records to identify the better payers amongst their customer base.
If the problem is too many of the wrong customers, look to ageing analysis to identify patterns and revise policies for poor payers. The longer an invoice goes unpaid, the higher the risk they’ll never pay, so following and tackling the accounts in the older aged debt buckets is a crucial part of good management, but it does not nip the problem in the bud. To do that, a more holistic view of everything that happens from an order into cash allocated is needed – which comes down to process optimisation.
Process Optimisation
The best process isn’t the most efficient, it’s the one that is most effective at hitting your DSO targets, but luckily, the two can go hand in hand. Get invoices out faster and with fewer mistakes and know for sure that they have been safely delivered and read by the accountable person. This is the key area that Corrivo billing fixes. Accuracy improves, queries reduce, dispute numbers drop – with squeaky clean, immaculate invoice creation and delivery, there is little room for a customer to pick fault or string out payment. You can be sure then that the issue lies in their ability or willingness to pay on time. Talk to us for a free health check if you are unsure if you have done enough to optimise processes.
Along with invoice automation comes digital proof of delivery and trackability of invoice status – with Corrivo at least. We give you an audit trail using closed-loop technology that allows you to see when invoices have been sent, delivered, opened and downloaded -and by whom. Our clients say they know they’ve done their best and can move straight into friendly conversations about payments due to ensure the best chance of getting paid on time before they invoke their collections or days beyond term processes. Corrivo Collections helps teams manage those processes pro-actively, effectively and with Ninja efficiency.
Reducing Credit Terms
Switching to Cash on Delivery may not be an option – but it does eliminate credit risk. Most B2B companies face pressure to extend credit terms rather than shrink them, but this won’t have a positive effect on DSO. Quite the reverse: unless you use Corrivo EPT (Extended Payment Terms). This new product from Data Interconnect lets your buyer pay later, while you get paid on time at 30 days or as usual, so it keeps your DSO where it should be: low. Contact us using ept@datainterconnect.co.uk for more information about this product.
Tracking and Tackling Aged Debt
It is well known that the longer an invoice remains unpaid, the less likely it is that the invoice will ever get paid. Once an invoice reaches 90 days beyond payment terms, the likelihood of it being paid drops by 30%. Having truly effective collections processes for early-stage aged debt (0-20 days beyond payment terms) and teams with KPIs around this will be a great start.
To help track each case through and manage the teams responsible, keeping them target-focused, Corrivo Collections has a number of workflow features and management dashboards that allow every user to keep their eyes on the bigger picture goals for the day or week, follow a prioritised worklist and never get swamped with paperwork – everything is logged, one click away and up to date so Collections managers can focus on only two things – hitting their numbers and keeping customer relationships intact.
The ageing analysis will show you where the problem areas are in your business. With good Management Information tools for searching, presenting and downloading data, you’ll have what you need to make a plan to tackle the issues of your worst offenders in the late payments arena.
Come back tomorrow for more on how we help our clients using ageing analysis and multi-level debt features to understand the issues of later payers across multiple ledgers and multiple companies in a group.
