4 Steps to Lowering Your Days Sales Outstanding (DSO) Forever
TThe heart of any business will stop beating unless the business maintains an uninterrupted flow of cash.
This cash isn’t found in unsent invoices or unpaid invoices. It’s the real, received cash that is physically in your account.
Each day your company’s “heart” is denied access to paid cash, your business is also denied the ability to generate more revenue. In fact, unsent and unpaid invoices are directly responsible for devaluing money you have yet to receive.
5 Facts You Need to Know about Days Sales Outstanding (DSO)
1. Days Sales Outstanding is also called Accounts Receivable Turnover. DSO is the result of a calculation (financial ratio) that shows whether the accounts receivables aspect of a business is failing to improve over a certain period of time.
2. The formula used to calculate DSO is:
Accounts Receivable DIVIDED BY the total amount of credit sales TIMES number of days in a given time period
3. A DSO number offers data regarding the length of time it takes for customers to pay their invoices.
4. Higher accounts receivable turnover ratios indicate a business with a faulty customer base that neglects to pay invoices in a timely manner. Alternately, a too-low DSO ratio may mean that credit policies are too strict and could be inhibiting sales.
5. DSO example: a company is owed $600,000 by their customers (accounts receivable). During a 30-day period, that company had $1 million in credit sales. The AR divided by credit sales equals 0.06. Take that .6 and multiply it by 30 days. The result is a DSO of 18, meaning it only took this business about 18 days to receive payment from its customers.
It’s easy to see how higher DSO numbers could indicate a company is suffering financially because something is seriously wrong with the way their accounting department manages the books.
In fact, companies of all sizes have discovered that when they lower days sales outstanding by 10 days, it’s worth a lot more to their overall business health than when sales increase by 10 percent.
4 Steps to Lowering your Days Sales Outstanding (DSO)–Forever
· Confirm who you are dealing with before letting them purchase products or services on credit. Make sure you have a customer’s legal entity correct, i.e., ABN, ACN, etc. This guarantees you invoice the correct entity and know exactly who you need to go after for payment.
· Conduct thorough credit checks to discover customer credit ratings before allowing them to purchase on credit. Banks don’t lend money unless they know they will get repaid so why should you?
· Regularly follow up on outstanding accounts and note when they are due. If a customer says they are paying this Tuesday and payment is not there on Wednesday, don’t hesitate to call them and say, “But you said you were going to make the payment yesterday”.
· Always deal with disputes as soon as possible. Involve your sales team if necessary and never procrastinate. When you delay taking action, this just gives a non-paying customer more “wiggle room” to get out of paying. When only a part of an invoice is disputed, ask the customer to pay the undisputed amount whilst the disputed amount is being investigated.
Yes, it does take a significant amount of time, effort and resources to lower days sales outstanding and keep that DSO number low.
So how do successful businesses do it?
Why Outsourcing is the Best Way to Lower Your Days Sale Outstanding
Smart businesses have found that the best way to achieve these four goals to lowering days sales outstanding is to outsource their accounts receivable to a debt collection agency immediately.
With over 35 years experience as a leader in the debt collection industry, receivables management and DSO reduction industry, Pro-Collect is the “go-to” debt collection agency servicing hundreds of companies in Sydney, the Central and Mid Coast, Newcastle and Australia-wide. To lower days sales outstanding by collecting on and closing out any size debt, call us today to start infusing the heart of your business with real cash that can promote the steady financial growth of your business.