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Reduce DSO: Minimizing Your Days Sales Outstanding

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There’s no reason to beat around the bush. Plain and simple, a lack of cash to operate with will literally kill your small business. In fact, poor cash flow management destroys businesses of all size, every year. What makes “proper cash flow management”? It’s collecting cash at the quickest rate possible and gaining time and flexibility for the payments you have going out. One of the most difficult parts of this management process is the debt collection and even more so, collecting the debt *quickly*. Your business should focus to reduce DSO (days sales outstanding). Why?

Reduce DSO: Minimizing Your Days Sales Outstanding

There are many reasons to blame for poor cash flow management. For example:

– Loans

– Fixed Assets

– Cash in non-interest bearing accounts

– Delinquent Accounts Receivable

– Delayed Days Sales Outstanding

Of all these, what makes delinquents accounts the most difficult is that it is the hardest to control. However, you pretty much can’t compete in today’s economy without extending credit to your customers.  Accounts Receivables create two problems: non-payers and late-payers. Non-payers require immediate legal action, assistance from 3rd party collectors or innovative solutions such as payment plans.

However, it’s those late-payers, the ones who drag out sending in their payment as long as possible that really tie up your cash in accounts receivable. That’s why as a business you have to pledge to reduce DSO. Not convinced? Just look at how much it costs to carry your receivables:

Calculate how much interest you would pay per day on your total annual receivables and multiply this by the average number of days it takes you to collect (Days Sales Outstanding).

*Interest rate could be the actual interest paid for line of credit, the prime rate, etc.*

Example:

Company ABC has $10,000,000 in annual credit sales and a DSO of 90 days. Let’s say the interest rate is 3.25%.

Use this equation:

- [ (Total Receivables x Interest) / 365 days ] x DSO

- [ (10,000,000 x 3.25%) / 365 ] x 90 = $80,137

Wow! Company ABC pays about $80,137 in interest per year to operate on trade credit

Some might see this as reasonable but if you can reduce DSO, imagine the cash it could push back into your business. Take a look at the numbers:

If Company ABC can reduce its DSO by just 10 days, that’s $8904 they’re not having to pay in interest. Let’s see how:

- [ (Total Receivables x Interest) / 365 days ] x DSO

- [ (10,000,000 x 3.25%) / 365 ] x 80 = $71,233

Simply, Company ABC can save $890 in interest for every day that it is able to reduce DSO. Just imagine what you could do with that cash!

Knowing that reducing your days sales outstanding, even just by a few days, can put major amounts of cash back into your business, how do you get this number to diminish?

1) INDUSTRY - To begin, it’s smart to look into how long your industry, by standard, extends credit for. This gives you a good idea of where you could gauge your term offerings. (Also, to get a good idea of how your company stacks up in regards to late payments in your industry and state, check out this receivables calculator.)

2) CREDIT - Look into your credit approval process. Do you have a credit application? Are you reviewing their business credit prior to offering terms? Being cautious about who you extend credit to can make a huge difference when trying to reduce DSO.

3) INVOICING - Are you customers all receiving their invoices on time? Are the invoices clear? Are you providing rewards for early payers and charging those who pay late? Have you made it easy for them to pay by offering online payments?

4) COMMUNICATION - Are you reminding customers of their payments? Have you asked them why they are paying late?

5) COLLECTIONS - Have you considered sending more accounts to 3rd party collectors? Could you install payment plans for more customers?

It is important to go through every step of your receivables management process and ask yourself these questions. Look at how you can improve each step of the process and you will see that these small changes can truly help you reduce DSO. The numbers don’t lie, reduce your days sales outstanding and your cash flow will be the healthiest it’s ever been.

 

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