Today, when a large number of invoices are issued, care must be taken to ensure that the DSO is not too high, which could have a negative impact on cash flow and operating capital. This is why it is now necessary to reduce DSO when it is too high.
- Higher borrowing costs to finance DSO
- Insufficient cash flow to purchase inventory and pay employees and operating expenses
- Insufficient cash to invest and grow your business
- Insolvency and possible bankruptcy
It is therefore essential for every company to reduce its DSO as much as possible.
But how should accounts receivable be managed? What are the signs or leading indicators that could lead to an increase in DSO? What measures should be taken to avoid a DSO increase that could lead to a cash flow trap?
Here are some ideas on what to watch out for and what you can do to prevent DSO from increasing.
Reduce DSO – Delay percentage
Changes in DSO are not automatically due to an increase in overdue accounts. First check the percentage of overdue receivables to see if this is the source of the problem.
If the backlog of receivables has not increased, or has increased only slightly in relation to the DSO, then it is necessary to re-evaluate the terms of payment (if you have different terms depending on the type of customer, or product…).
For this, you can have a great combination of longer payment terms, or have your sales department use terms more aggressively to increase orders. Above all, however, you need a balanced solution that meets market needs without putting your business at risk.
In other words, if the percentage of overdue receivables has increased, you need to focus your teams’ efforts on those accounts that are overdue.
Days of delay
The first step is to determine which accounts are contributing to the increase in DSO, and then identify which invoices are overdue and for what amounts. Ensure that invoices with a large number of overdue payments are paid as a matter of priority.
An unusual increase in overdue days can sometimes reveal unresolved disputes or a change in a customer’s financial situation, which may require further follow-up action.
Cost of credit
Calculate the cost of deferring accounts receivable by invoice. This is an excellent way to focus your team on collection priorities.
How to reduce DSO
Winning a war requires accurate and timely intelligence. Your team also needs accurate and timely reports to identify the reasons for DSO expansion and focus on the actions needed to reduce it.
If you don’t have automated accounts receivable, this means exporting data from an accounting system and using customized spreadsheets to calculate and analyze the data. This is time-consuming.
To be more efficient and save time, automated accounts receivable solutions can provide your team with the real-time information they need to identify the causes of DSO expansion so that efforts can be prioritized to reduce DSO.
The key to automating accounts receivable and reducing DSO is to work with an experienced software partner.
Aston iTF is a receivables and credit management software that automates reminders by 80% and reduces overdue receivables by 50%.
Find out how to improve your DSO? Optimize debt collection, but that’s not all!
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