For treasury and cash management professionals, managing Days Sales Outstanding (DSO) is not just a matter of operational efficiency; it’s a crucial factor in maintaining a company’s financial health and stability. DSO directly affects liquidity, working capital, and overall cash flow, which in turn influences a company’s ability to meet its financial obligations, invest in growth opportunities, and manage risks. By effectively reducing DSO, treasury and cash management professionals can enhance cash flow, minimize financing costs, and improve the company’s financial agility.
Reducing DSO requires a proactive approach to addressing the common pain points that contribute to extended receivables periods. Treasury and cash management professionals must collaborate with receivable teams to implement strategies that streamline processes and optimize cash flow.
This article details six strategic approaches to minimizing DSO and strengthening your bottom line.
Pain points leading to long DSO
Before diving into specific strategies for accelerating cash flow, it’s crucial to recognize the pain points that often contribute to extended receivables periods and prolonged DSO:
- Inefficient invoicing processes. Delays in invoice generation and delivery can push back payment timelines, creating cash flow bottlenecks.
- Poor credit management. Inadequate assessment of customer creditworthiness can result in bad debt and delayed payments, impacting liquidity.
- Lack of payment options. Limited payment methods can hinder customers’ ability to pay promptly, extending the time it takes to receive funds.
- Manual cash application. Manual receivables processes are time-consuming and prone to errors, leading to delays in applying cash and reconciling accounts.
- Unresolved Deductions. Unmanaged deductions can accumulate, creating discrepancies and causing payment delays.
- Ineffective collections management. Inconsistent follow-ups and a lack of automation in collections can prolong the receivables cycle.
Each of these receivables pain points can have a significant impact on an organization’s DSO.
Six strategies to reduce DSO and improve Cash Flow
The following best practices can help reduce DSO.
- Reevaluate & refine credit management procedures
Effective credit management is essential for reducing DSO. Start by thoroughly assessing the creditworthiness of new customers during the onboarding process. Review their payment history from credit bureaus and set appropriate credit terms based on their risk profile. Regularly update internal credit management policies and establish a standardized credit scoring model to enhance risk assessment and decision-making. And then monitor the credit health of customers for potential issues.
2. Strengthen your invoice delivery process
Timely and accurate invoice delivery is critical to optimum DSO. Confirm with clients their preferred method for processing and receiving invoices. Establish a regular schedule for invoice delivery. And consider transitioning to electronic invoicing to eliminate delays associated with traditional mail. Automating the invoice delivery process can provide real-time status updates, reducing the need for follow-ups and ensuring prompt receipt and acknowledgment of invoices.
3. Make payments convenient for customers
Facilitate easier payments by offering online payment options and self-service portals where customers can access invoices and historical payment details. Encourage customers to use electronic payments to expedite cash flow. Revise payment terms, such as accepting cards at net 10 instead of net 30 to incentivize faster payments with electronic methods. Implement dynamic surcharging to recover costs associated with card payments. And consider offering discounts for early payment.
4. Tighten loose ends in your cash application process
Efficient cash application has a significant impact on DSO. Aim for same-day cash application to avoid delays. Encourage customers to include remittance information with their payments. Promptly follow up on unapplied cash. And utilize artificial intelligence (AI)-powered remittance management and automated payment allocation to streamline the process and minimize manual tasks.
5. Don’t let deductions fester
Proper deductions management is crucial for reducing DSO. Implement stringent policies for reviewing and resolving deductions. Ensure that strong terms and conditions are in place. Automated deductions management solutions can assist by creating work lists, aggregating details for quick resolution, and generating digital workflows for resolving deductions based on pre-set criteria.
6. Beef up collections management
Proactive collections management is a sure way to reduce DSO. Send payment reminders as invoices approach their due date. Promptly follow up on promises-to-pay. And consider deploying an automated collections management platform to enhance visibility and efficiency through electronically presented dunning statements, AI-driven prioritization, and suggested responses.
Reducing DSO is integral to improving cash flow and maintaining financial stability. By addressing common receivables pain points, treasury and cash management professionals can achieve more predictable cash flows, lower financing costs, and stronger financial position for the business.
