In today’s unprecedented — and unpredictable — economic landscape, it’s important that companies of all types manage their cash flow. Effective cash flow management gives companies much more control over their business and its overall health. Not only does cash flow management allow them to pay off debts and reinvest in the business, but it also provides a buffer during times of economic uncertainty or hardships.
An important player in effective cash flow management is days sales outstanding (DSO). DSO is the average number of days it takes a company to collect a customer’s payment for a sale. It’s usually determined on a monthly, quarterly or annual basis. Part of the cash conversion cycle, DSO is also sometimes referred to as “days receivables” or “cash collection period.”
Companies that closely monitor their DSO and keep it in check tend to better manage their ongoing cash flow — an important factor in the overall health of a business and its ability to innovate and grow.
Calculating and understanding DSO
You can use a fairly straightforward formula to determine your DSO. Simply divide the total number of accounts receivable during a given period by the total value of credit sales during the same period — then multiply that result by the number of days in that period.
Number of Accounts Receivables / Number of Net Credit Sales x Number of Days = DSO
Your result can tell you a lot about your business. A high DSO number may indicate that your customers are making their payments late, which can be a cause for concern in overall cash flow management.
On the other hand, a low DSO suggests that you’re receiving payments from your customers on time — perhaps even early. This means you’re cash flow positive. You have money on hand to pay your bills and expenses, provide that buffer in the event of a hardship, and invest into the health and growth of your business.
According to Investopedia, a DSO below 45 days is generally considered to be low. But according to a recent study of 27,000 companies globally, the average DSO is 64 days — and 25% of companies have a DSO of 88 days.
What does this all mean for your business?
It’s important to monitor your DSO regularly and keep your finger on the pulse of the liquidity of your business. Sure, it is expected to fluctuate here and there, but knowing where your DSO stands at any given time gives you valuable insights into your cash flow — and can serve as a canary in the coalmine of a business heading toward trouble.
If you see your DSO sharply spiking or even just creeping upward, it could be a warning sign that something is wrong — or about to go wrong. Customer satisfaction might be declining and they’ve stopped paying their bills on time. Your sales representatives may be trying to hit their sales goals by offering longer terms of payment to customers that traditionally paid in shorter time periods. Or you may be allowing customers with less than satisfactory credit histories to make purchases on credit.
Increases in DSO — particularly those that happen fast and rise significantly — can cause concerning cash flow problems for your company. If you can’t reinvest in your business or worse, even pay your own bills on time, your operations can be seriously disrupted.
4 Ways to improve DSO
Thankfully, there are a few steps you can take toward increasing cash flow and ensuring your customers are paying you as quickly as possible.
Implementing TreviPay helps you provide multiple payment options and lower DSO — ultimately removing the challenges that accompany restricted cash flow.
1. Extend terms to buyers. You can eliminate the source of high DSO (the payment itself) by implementing technology that generates invoices and extends credit to buyers on your behalf. This gives you more reliable working capital and more orders from customers, as well as greater loyalty.
2. Speed up accounts/receivable processes: By outsourcing A/R processes such as underwriting, onboarding, invoice submission, matching remittance information, reconciliation and collections, your A/R teams are better able to handle an influx of new business without sacrificing efficiency.
3. Incentivize buyers: Offering high quality incentives, such as discounted pricing, motivates customers to pay on time, or even early.
4. Offer multiple payment options: The reality is, customers want to pay using their preferred payment method. If that’s not available, they may be slow to pay — or worse, they may abandon the transaction all together. By offering multiple payment options, you’re more likely to give them the opportunity to pay how they like, and receive their payment on time or sooner.
Implementing even one of these four strategies can substantially lower DSO and cash flow. And because payment inefficiencies can have an impact on the customer’s experience, a purchasing experience that’s line with their increasing expectations may also boost loyalty and repeat purchases.
Today’s B2B ecommerce landscape has forever changed. B2B buyers want the same frictionless payment experience they’ve come to expect in the B2C world. And B2B companies want to easily manage cash flow while offering customers highly satisfying online shopping experiences.
An online alternative payment method that offers speed, convenience and personalization such as net terms helps you lower DSO and manage cash flow more effectively.
Learn how TreviPay can help you lower your DSO and improve cash flow.