The economic fallout of COVID-19 has forced businesses to make tough choices. From cutting expenses to extending payment terms with suppliers, many companies are prioritizing short-term survival. But once the immediate crisis subsides, a focus on mid-term strategies becomes crucial – especially those that ensure ongoing cash flow.

why DSO Matters?

Days Sales Outstanding (DSO): The average time it takes to collect customer payments.
Impact on Cash Flow: Lower DSO means faster cash collection, improving a company's financial health.
The DSO Challenge in a Downturn

Experts predict a rise in DSO across industries as businesses prioritize extending payment terms to suppliers, potentially impacting your own cash flow.

Strategies to Keep DSO Low During Crisis

While you can't control a customer's payment schedule, you can optimize your internal processes to expedite collections:

Streamline Accounts Receivable (AR) Operations:

Minimize Invoice Errors: Automate invoice generation to eliminate errors that delay payments.
Reduce Payment Processing Time: Leverage automation for faster invoice delivery and payment options.
Customer Segmentation and Analysis: Identify high-value customers and their payment patterns to prioritize collections and potentially offer flexible payment options during challenging times.

Collection Strategies for Faster Payments:

Review Payment Terms: Consider offering early payment discounts or imposing late payment penalties to incentivize faster payments.
Implement Credit Restrictions: Evaluate creditworthiness before extending credit to customers.
Balancing Cash Flow with Customer Relationships

Remember, customer loyalty is key. In some cases, it might be strategic to tolerate slower payments from high-value customers while navigating the crisis together. Consider offering temporary payment plans or adjusting credit limits for these clients.

Predictive Analytics and Machine Learning for DSO Optimization:

Advanced Data Analytics: Utilize data analytics tools to identify patterns in customer payment behavior. This allows you to predict potential late payments and proactively implement targeted collection strategies for at-risk customers.
Machine Learning for Credit Risk Assessment: Implement machine learning algorithms to assess customer creditworthiness more accurately. This empowers you to make informed decisions about credit limits and collection strategies for each customer segment.
Leveraging Artificial Intelligence (AI) for Intelligent Automation:

AI-powered Chatbots: Integrate chatbots within customer portals to answer basic payment-related questions and facilitate self-service options for customers, reducing AR team workload and improving efficiency.
AI-driven Collections Strategies: Utilize AI to personalize collection tactics based on customer behavior and payment history. This allows for a more nuanced approach that balances efficiency with customer relationships.
Supply Chain Optimization and Collaboration:

Early Payment Programs with Suppliers: Negotiate early payment discounts with reliable suppliers to free up cash flow. This strategy can be particularly effective if the early payment discount is lower than the potential increase in DSO from customer delays.
Collaboration with Logistics Partners: Streamline communication and data sharing with logistics partners. This ensures faster delivery confirmation, which can expedite invoicing and potentially accelerate customer payments.

Dynamic Discounting for Optimized Cash Flow:

Implement a dynamic discounting program that tailors early payment discounts based on real-time factors. This could include the customer's creditworthiness, current cash flow needs, and the historical payment behavior of similar customers. Dynamic discounting allows you to offer more attractive discounts to high-risk customers who might otherwise delay payments, while maintaining margins for reliable customers.
Reverse Factoring to Mitigate Risk and Improve Liquidity:

Explore reverse factoring, a financial arrangement where a third-party factor purchases your accounts receivable at a discount. This provides immediate cash flow and mitigates the risk of bad debt, particularly for companies with a significant volume of invoices from customers with uncertain creditworthiness.
Blockchain Integration for Secure and Transparent Transactions:

Integrate blockchain technology into your AR processes. Blockchain offers a secure and transparent platform for recording and tracking invoices, payments, and associated documents. This enhances data security, reduces the risk of fraud, and streamlines the reconciliation process, potentially accelerating payment cycles.
Big Data Analytics for Customer Segmentation and Targeted Collections:

Leverage big data analytics to create highly granular customer segments based on a wider range of data points beyond just payment history. This could include industry trends, customer demographics, and purchasing behavior. With more precise customer segmentation, you can tailor collection strategies and communication styles to each segment, maximizing collection success rates while maintaining positive customer relationships.
Predictive Modeling for Proactive Risk Management:

Develop predictive models using machine learning algorithms to identify potential payment delays before they occur. This allows you to implement proactive interventions such as early communication, personalized payment plans, or temporary credit limit adjustments. Early intervention can significantly improve on-time payment rates and reduce the need for more aggressive collection tactics.

By venturing beyond traditional methods and embracing these advanced strategies, businesses can achieve a more sophisticated and data-driven approach to DSO management. From dynamic discounting and reverse factoring to harnessing the power of big data and blockchain technology, these techniques empower companies to optimize cash flow, mitigate risk, and build stronger customer relationships during economic downturns and beyond. Remember, a proactive and data-driven approach to DSO reduction is not just about survival in challenging times, but also about gaining a strategic advantage in a competitive marketplace.

IFRS 9 - Impairment of Financial Instruments