How Financial Leaders Save Time on Driving Down DSO
Days sales outstanding (DSO) may be one of the most well-known financial performance metrics applied to order-to-cash (O2C), or more specifically the accounts receivable (AR) process. This is not without good reason; the longer it takes to bring cash in from sales, the more stretched cash flow becomes and liquidity drops.
CFOs are unable to fulfill growth initiatives without the liquidity to invest in them. High profitability is nothing without the cash flow to drive growth and profitability at scale.
This article looks at the ways in which financial leaders can drive down DSO to liberate working capital for investment in growth, and how time savings can be made in this process.
The traditional approach to this has been business process improvements through new technology, training and process change, which incrementally chip away at DSO. However, more dramatic solutions are available that can rapidly reduce DSO, and fix it via guaranteed payment within a given timeframe, all without negatively impacting customer experience.
Is Days Sales Outstanding a Good KPI?
Benchmarking accounts receivable performance with DSO as a metric can unfairly reflect on stakeholder performance. For instance, growing sales in a region (or industry) used to long payment terms will naturally have a negative impact on DSO.
Customer relationships may depend on the flexibility of your credit terms. Customers may have many reasons for not being able to pay sooner, such as their role in a bigger supply-chain, or markets which need to extract payment from insurance – such as healthcare in North America . Reducing DSO below a certain point may simply not be viable for some customers, as they may need the full number of days provided in their credit terms to generate sufficient cash flow to pay you.
New customers’ procurement departments may negotiate longer credit terms as part of their contracts, to support their financial needs via higher days payable outstanding (DPO).
Growing sales and profitability at the cost of higher DSO to support this growth is not uncommon. High DSO may be tolerated for the sake of growth, but ultimately most businesses seek lower DSO to improve cash flow and liberate working capital – capital which can be put to work for business growth. So what can financial leaders do to drive down DSO without contradicting its role in business growth?
Streamlining Accounts Receivable Processes for Reduced DSO
Anything that can reduce the amount of time taken between sale and payment shortens the cash cycle and can have a positive impact on DSO. Accounts receivable workflow should enable invoices to be delivered as close to real-time as possible.
Removing any requirement for administrators to copy-paste, upload or manually rekey invoicing data as part of invoice creation and delivery will vastly streamline workflow. This results in invoices going out more quickly and accurately, cutting down on disputes due to invoice queries, too.
Anything that can be done to help customers from a self-service perspective, such as making payments or requests for reprints/download of old invoices and statements via online portals or similar approaches, will reduce calls into support or the AR team for assistance. This saves even more time while further improving customer experience.
AR Automation to Reduce DSO
Automating accounts receivable processes, such as the generation or delivery of invoices, will contribute to shorter payment timeframes and help lower DSO.
The process automation of AR also benefits your customers’ accounts payable departments. Ensuring more accurate and timely invoices, as well as providing them with more streamlined payment processes, can help them take advantage of incentives like early payment discounts.
AR Automation creates a culture of data-driven AR processes, via connection to your ERP system, and opens the opportunity to apply data analytics as part of business process. Advances in machine learning and other aspects of artificial intelligence can further streamline and improve cash flow forecasting as well as identify potential late payers ahead of time.
AR process automation can also include automated follow-up communications, where there is visibility of receipt – most easily achieved via e-invoicing (more details on this below).
Electronic Invoicing for Improved Accuracy, Speed and Security
Electronic invoicing (e-invoicing) has been a game-changer for invoice delivery speed, accuracy and security – saving time on both sending and invoice processing. So much so that many countries now mandate e-invoicing for business to government (B2G) or public sector invoices.
Electronic invoicing reduces late payments (and therefor DSO) by cutting down on the time required to get invoices out and payments in. Modern electronic invoicing presentment and payment (EIPP) platforms, such as Corcentric EIPP, allow self-service functionality for customers to access invoice histories, as well as make online payments via credit card, ACH or other payment methods.
Electronic invoicing is a reliable way to quickly deliver invoices to your customers in a broad variety of formats, supporting the automation of delivery rules and streamlining online payments for a reduction in DSO.
Order-to-Cash Cash Flow Predictability
Accurate cash flow forecasting is essential to support financial decision making. The more accurately you can predict your company’s cash flow, the more aggressively you can invest capital for growth.
Financial leaders need visibility of collections process performance against the accounts receivable ledger to invest confidently. As accounts receivable processes become more data-driven and electronic, dashboards replace traditional reporting procedures, providing real-time insights for CFOs and other strategic financial stakeholders to make spending decisions with confidence.
However, cash inflow from accounts receivable can be thought of as one cash flow silo. True cash flow forecasting also needs to take into account the equivalent cash outflow silo of accounts payable. You can find a more detailed examination of this topic in our blog about the unseen cost of cash flow silos.
The Shortcut to Driving Down DSO and Liberating Working Capital
All of the aforementioned approaches to lower DSO require investment in people, process and technology. These all take time, come at a cost and do not necessarily guarantee a specific reduction in DSO. Granted, done well they will undoubtedly contribute to lower DSO, but some may only offer short-term improvements, rather than dramatic and permanent reduction, such as brining DSO down from 37 days to 15 (as in this case study on how Daimler reduced their DSO).
Furthermore, reducing DSO tends to rely on customers paying sooner, which isn’t always in line with their preferences. Customer satisfaction may take a hit if you are asking customers to pay sooner, even if your invoicing and payment processes are top-notch. In order to maintain the best customer experience, credit management processes may be encouraged to extend credit terms beyond your ideal payment timeframes.
Reconciling your customers’ preference for longer payment terms with your KPI of lower DSO can be achieved through a form of supply chain financing, to bridge this payment gap. At Corcentric, we provide this as part of our Managed Accounts Receivable (MAR) service. Through MAR, we act as an extension of your accounts receivable team to manage the creation, delivery and collection of invoices, funding the difference between your ideal payment terms (e.g. 15 days) and the reality of your current DSO (often more than 60 days).
MAR also supports the need for risk-management through a non-recourse agreement. You get paid on-time, every time and are not liable to return any payment to us if your customers default on their invoice payments. MAR not only provides a route to liberate millions in working capital instantly, but also eliminates bad debt from day one!