Managing for cash is different from managing for accounting profits or revenue. Most managers understand the basics of profit or loss, such as revenues, margins and costs. Far fewer understand the key items of the balance sheet such as accounts receivable and inventories.
Accounts Receivable for many companies is among the top tangible assets and yet companies have under-invested to manage it. leading to it getting locked in their own balance sheet. To generate cash through better receivables management, companies have interchangeably used metrics like Accounts Receivable Aging or Days Sales Outstanding ( DSO )
An Aging report simply shows the various aging buckets of Receivables e.g. 30-60 days, 60-90 days etc. This report helps businesses identify invoices that are open and allows them to keep on top of slow paying clients. However, this may not be enough.
On the other hand, DSO expresses the average number of days it takes a company to convert its accounts receivables into cash, which is a more relevant performance indicator.
DSO is one of the best indicators of company’s ability to convert their receivables to cash. Most companies will review their receivables on a weekly basis and adding DSO as a measurement can significantly improve the review process. Generally, DSO is determined on a monthly, quarterly or annual basis, and can be calculated by dividing the amount of accounts receivable during a given period by the total value of credit sales during the same period, and multiplying the result by the number of days in the period measured.
The Formula for Days Sales Outstanding Is
To improve cashflow and reduce DSO there are five key measures one can take and all of them are within your control –
1. Timely and accurate invoicing
Companies, be it small or large, order processing, tracking and invoicing can be challenging due to manual processes or several disparate platforms. Common mistakes that occur are missing out of deadline set by customers to invoice and in turn missing their payable cycles. Another area that needs closer supervision is the unit rates mismatch. This leads to next important measure, Dispute Management.
2. Dispute management
Invoice disputes are part of parcel of any B2B business, however, the way disputes are handled can make a significant difference to improve DSO metrics as well as customer satisfaction. Customers tend to hold off the payment in case of multiple disputes. If disputes are not resolved quickly, the uncollectible amount owed could hurt a company’s cash flow resulting in a direct financial loss of the company. Setting a process and using a dispute resolution tool will lead to efficiently resolving any sort of discrepancies that could arise due to inaccuracy or incompleteness of invoices and billing documents.
3. Manage delivery & installation on time
Products that have installation as the next milestones requires a close coordination between logistics, site readiness and services team. Often it is seen poor coordination between the three can lead to delayed payment cycles, disputes or even customer satisfaction issues leading to sales return / write-offs.
4. Payment reminders before due dates without irritating your customer
60% customers pay on time or closer to due date because they were reminded and their invoices related issues were resolved on time. An approach of a same cookie cutter communication all customers big or small, may backfire. One need to balance between multiple reminders, language used in communication and more importantly personalize basis the customers you are dealing with.
5. Track milestones that have linkage to invoice payments
Invoices which have multiple milestones are the hard ones to keep DSO under control. They are hard because of dependencies on series of tasks that organization need delivery. Many of such tasks will involve cross functional collaboration as well with multiple stake holders at customers end.
We at Kapittx enable your collection teams and sales teams to collect payment faster and more efficiently than before. Request for a demo now and experience how Kapittx will speed up the payments and reduce DSO by more than 25%.
-Kumar Karpe, Kapittx Co-founder & CEO