Reduce Your DSO and Improve Cash Flow
Improve Your Cash Flow
Days Sales Outstanding (DSO) is an average measurement of how long a business takes to collect payment after making a sale. Unless you collect payment in full at the point of sale, then your business has an average DSO. Every business, big or small, can improve cash flow by reducing its DSO.
Another advantage of reducing your DSO is that the business will generally incur less interest expense over the long term, since the business will need less short term debt to stay afloat while the receivables catch up. Conversely, a high DSO translates to greater interest expense, and can indicate fundamental problems in the way a company manages accounts receivable.
Your A/R department can reduce its DSO by streamlining accounts and collection procedures. Following these tips will help you get your DSO and accounts receivable department into optimal shape:
- Review your choice of A/R software. The way you kept the books when your business was smaller may not be the best way for today’s business. Is your current software a good fit for your type of business? Have you looked at online systems to see if there is another option that might work better for you? Specialized software exists for many different types of businesses, so do a little research before your settle for the same old, same old.
- Update your software. Your existing accounting software company would probably like to keep you as a customer. The market is competitive, so don’t be afraid to ask for a discount if all you need is an upgrade. For that matter, if you decide to change software, check with the software provider to see if they offer discounts for new customers.
- Review your A/R procedures. Invoices should be issued contemporaneously with a sale, so be sure your staff is trained accordingly and you have a system in place to be sure invoices are issued in a timely manner. If you don’t already do so, consider offering a discount to customers who pay very quickly. Also, take a little time to review your A/R department’s written policies and procedures, including credit policies and a collection timeline.
- Schedule periodic A/R reviews, and act accordingly. Review your accounts receivable at least monthly, or more often depending on business volume. Any accounts more than 90 days past due should be considered delinquent and forwarded to collections.
Inevitably, there will be some accounts that need to go to collections. As part of a comprehensive receivables management plan, every business should have a relationship with a professional debt collection law firm. The best time to find the right debt collection law firm for your business is before you need legal collection assistance. The beauty of having a collections attorney relationship in place is that you can forward delinquent accounts seamlessly and easily, as often as needed.