Decrease DSO: Understanding the Why and How

Historically, getting your invoices paid in 30-60 days was an indicator of having successful Accounts Receivable (AR) processes.  

In recent years, however, the pace of business has only been matched by rising operating costs, resulting in a need to shore up your business' cash balances in order to meet set obligations and tackle new ventures.  

This means it is important to aggressively and proactively reduce the time it takes your firm to collect on money it is owed – a metric known as Days Sales Outstanding (DSO). 

Let’s explore the advantages of lowering your DSO as well as uncovering strategies for how you can do it.   

The Why: Advantages of Lower DSO 

First – here’s why you should look to decrease your average DSO among your customers:  

You’ll Have Access to More Cash 

Every business needs to be able to cover overhead costs. You need cash to pay for employees' expenses and meet other financial obligations. Having an exceptionally challenging month or period can stretch your working capital thin, potentially placing your firm in a precarious position. 

According to JP Morgan, only half of all small businesses have enough cash on hand to support 27 days of usual outflows. The same study also reports that 25% of businesses have fewer than 13 cash “buffer days” – a buffer day representing the number of days of cash outflows a business can pay if its cash balance inflows stop. 

Lowering your DSO gives your firm more cash on hand, which in turn provides you with a bigger pool of cash reserves with which to cover your overhead costs.  

You’ll Have More Flexibility to Pursue New Ventures 

Cash is synonymous with growth. When more of your money is tied up than it is accessible, you limit your ability to take on new ventures and aggressively pursue attractive opportunities.  

Not having enough cash on hand can also create bottlenecks in your operations. Furthermore, having more cash on hand paired with a reliable, effective collection strategy makes your firm more appealing to other firms for partnerships or joint ventures.  

According to Clayton & McKervey, there are two important aspects both buyers and sellers must represent within mergers and acquisitions (M&A) – strong financials and a strong cash position.  

Access to cash is one of the top indicators of success for private equity firms. As their participation in the architecture and engineering (AE) industry increases. organizations need to establish practices that increase cash inflow.  

The How: Strategies to Lower DSO 

Minimizing your DSO is a great way to safeguard your firm and set it up for success, but actually doing it is easier said than done. Here are several strategies you can implement to get paid faster.   

Efficient Invoicing 

Delivering invoices at standard intervals and in an automated manner ensures a level of consistency that your customers will appreciate. Invoices must be clear and easy to understand. Automated follow-up ensures no invoice gets overlooked. 

Dynamic Discounting 

One effective strategy is to offer a discount date for early payments, incentivizing your customers to pay sooner. By adding this as a standard component (for example, a 5% discount for payments made within 30 days), your firm can smooth its cash flow and bring money in sooner. 

Multiple Payment Options 

Offering multiple payment options is an easy way to reduce friction in your payment process. Just as is the case with consumers, businesses have a wide range of preferences for their preferred payment methods.  The more choices you can offer, the more likely you will meet your customer’s requirements and get paid faster. 

Electronic Payments 

While checks still account for approximately 40% of all B2B payments, electronic payment methods such as ACH and credit cards are quickly gaining “wallet share” and now account for more than half of all B2B payments. 

Electronic payments clear debts and inject cash into your firm immediately. With payment portals that save banking or credit card information and ensure automated entries in your accounting system, the payment process can be completed quickly, securely, and with no errors.  

Lowering your DSO can significantly improve the health and future of your business. Every day that you are able to get paid faster by your customers will help tighten up your business, giving you access to more cash and more flexibility to grow. By implementing the strategies mentioned above, you can optimize your collections process, ensuring a more stable and predictable cash flow. 

Interested in learning more about how your firm can lower your DSO through AR Automation? Schedule a quick one-on-one session to learn more.