Keeping DSO Down
As the economic impacts of COVID-19 continue to unfold the world, many organizations face hard decisions. If your company is slashing discretionary spending, lengthening its payables, and making some difficult near-term choices about the business, you’re not alone. Once you’ve made the most immediate decisions about your company’s survival, the next step is considering the mid-term strategies you will need to implement over the next three to six months to ensure ongoing liquidity.
Because days sales outstanding (DSO)—the average number of days it takes an organization to collect payments from its customers—is directly linked to cash reserves and liquidity, working toward the best possible DSO is an essential strategy in moments of downturn and crisis.
There is good reason to believe that DSO will go up across the board in the coming months, as organizations work to lengthen their payables to maintain a stronger cash position. What can organizations do during an undoubtedly chaotic time to keep DSO as low as possible and continue bringing cash in?
The good news is that the best strategies for improving DSO are still effective. While organizations cannot always control when (or whether) a customer sends payment, one area they can control is optimizing and streamlining accounts receivable (AR) processes as much as possible.
Invoice errors delay the time it takes to get an accurate invoice to the customer, which in turn delays the time it takes the customer to pay. If your AR processes are resulting in invoice errors, automation can make a decisive impact in this area. Beyond reducing cycle times for invoicing, automation enables faster payment. Both help bring in cash more quickly.
While automation undeniably works wonders to help lower DSO, all the automation in the world will not bring in cash from customers that are delaying payment. As organizations work to streamline their processes, they should also conduct customer and customer-segment analysis, particularly on high-value customers.
There are a range of strategies and tools at an organization’s disposal to collect from customers more quickly, including updated payment terms, early pay incentives (or late payment penalties), and credit restrictions.
All of these strategies should be on the table to ensure a company’s ability to keep paying its expenses in the middle of a crisis.
A word of caution is in order, however: Be careful not to burn bridges with your customers. While the preservation of your company is the highest priority, keeping that high-value customer might make it worth accepting slower or lower payments as you and your customer work through the crisis.
Keeping DSO Down