Days Sales Outstanding (DSO)
DSO indicates the average amount of days it takes your company to collect funds after a sale has been made. The lower the DSO is, the more cash is available for business to reinvest in marketing, sales and operations. Reducing DSO is one of the largest challenges for many businesses due to the company-wide strategy that’s necessary to do so. With improved DSO, a business’s cash flow increases significantly, allowing for funds to be allocated to growing. One simple method to reducing DSO is converting paper to email with electronic invoicing, which also reduces labor and material costs. Businesses can often reduce the collection cycle by 2-6 days after implementing electronic invoicing. Another strategy includes sending triggered reminder letters. In most occurrences, clients do not decide to avoid paying an invoice – they have just simply forgotten. This is the major challenge associated with reducing DSO. Electronic invoicing and reminder emails can greatly assist in overcoming this challenge.
Write-offs occur upon the realization that an asset, in this case accounts receivable, can no longer be converted into cash or provide further use to the business. Receivables cannot be written off until collection efforts have ceased. You can base your IRS write-offs on aging of accounts. If an account is more than six months old, the likelihood of receiving payment without a collection agency or lawsuit decreases substantially.
- 26% of invoices 3 months old are uncollectable
- 70% of invoices 6 months old are uncollectable
- 90% of invoices 12 months old are uncollectable
Minimizing write-offs is a key component in improving cash flow. The smaller the write-off amount is, the happier the business remains. This means the faster you can reduce the write-off amount, the better off everyone will be. See more powerful accounts receivable statistics in the
Your customers make up your portfolio of business. With a portfolio, comes credit risk. We’ve all had customers with a history of paying on time and those customers that pay, but they pay late. The key to keeping a healthy cash flow and low DSO is to isolate the late payers. Later payers can have different credit limits and collection strategies applied to their accounts in order to reduce risk. Carefully monitor payment trends with aging reports and implement a credit rating system to reduce overall credit risk.
The most common way businesses track credit worthiness is to pull your customers’ credit rating from a credit-monitoring firm. There are many credit-monitoring firms our there; popular firms include Dun and Bradstreet, Experian, and Equifax to name a few. These firms allow you to check credit on an individual business, a subset of or your entire customer portfolio. If you want your customer’s credit rating updated on demand and available immediately for credit worthiness decisions, select a credit-monitoring firm that integrates with your account receivable or collections software system. One of the oldest and largest credit-monitoring firms is
Discover a Solution
It’s no secret that collecting accounts receivable has its fair share of unique challenges. However, overcoming these challenges becomes systematic once you’ve found an effective method to track the metrics and implement collection strategies. One proven method is the use of an
On top of providing accounts receivable metrics for analysis, a collections system should offer tools to automate mundane tasks. These tools within the system automatically highlight the accounts that need attention and schedule reminders, letters and calls for those accounts. Sometimes the reactive approach to managing accounts receivable just doesn’t cut it. Being proactive with your collections process will allow you to see improvements in your cash flow.