How can you reduce DSO (days sales outstanding) to get paid faster and keep your organization running at its best? Here we debunk some traditional strategies that can actually hinder your goals and suggest best practices to improve DSO.
What is DSO and what does it mean for your business?
As companies are trying to navigate changing and more flexible work environments, they’re also looking for ways to become more efficient. Does this sound like you? There are many metrics that can be put in place to measure success, but one way to help your organization run more smoothly and keep afloat during tough times is to reduce days sales outstanding.
Days sales outstanding (DSO) is the measure of the average number of days that it takes a company to collect payment for a sale. The fewer days your sales are outstanding, the faster you, as the supplier, get paid. Lower DSO improves your cash flow and keeps your business running at its best. However, a higher DSO can hinder your business from growth since your profits aren’t being realized on time. In turn, this slows down the rest of your operations that run your business.
In a perfect world, your customers would always pay you on time, if not in advance. But that is not how it plays out most of the time. In today’s world, with more uncertainty and organizations adopting leaner models, it is getting even more challenging for your customers to pay you on time or in advance.
So how can your organization thrive and reduce its DSO? I’ll explain why some traditional strategies you think might work can actually hurt you in the long run. Then I’ll lay out some innovative strategies you can adopt that will help improve your long-term cash flow.
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Traditional strategies to reduce DSO
There are some strategies that your organization may have heard of or tried out to reduce DSO. Although they can work short-term, I do not recommend these strategies for long-term use. Here are some traditional strategies meant to reduce DSO and why they’re not as effective as you may think.
- Payment reminders:
One traditional strategy is sending your customers reminders to encourage them to pay you faster. While this can work for some customers, it doesn’t make a big enough impact to consistently lower your DSO over time.
- Incentives:
This strategy gives your buyers some incentive to pay their invoices faster. Most incentives come in the form of discounted services. While incentives can help you get paid faster, using them as a long-term strategy can hurt your profits, since you’re consistently losing money from offering discounts.
- Multiple payment methods:
While it’s a great practice to have multiple ways for customers to pay you, it doesn’t necessarily help them pay you faster.
So, if these aren’t the best solutions, what is? Don’t fret. There are strategies you can adopt to organically reduce your DSO without needing to constantly reach out to your customers and offer discounts. In fact, the strategies I’m about to reveal can actually help you save more money, foster positive relationships with your trading partners and give you more visibility and control as to where your invoices are in the cycle.
Best practices to reduce DSO
The best way to truly reduce your DSO over time is to approach your accounts receivable process holistically. Rather than focusing simply on the part where your customers pay you, look at what changes you can make to shorten the time spent getting the invoice prepared, sent and finally received by your customer into their accounts payable system. Here are our suggestions for the best practices to improve DSO:
- Go paperless:
Paper invoices take lots of manual work on both sides, and too much time to get to your customer. Using paper creates time-consuming steps like preparing the invoice, sending it to your customers, collecting receipts and getting feedback. Going paperless improves your team’s visibility, increases data accuracy and reporting and allows documents to be sent and received much quicker, overall lowering your DSO.
- Digitalize your invoice process:
If you want to increase efficiency even more, then completely digitalize your invoice process. This means, rather than using mail or email, you can distribute your invoices as true e-invoices that can be imported directly into your customers’ systems. Not only will you get the acknowledgement that the invoice has been received, you will also get feedback on missing information within seconds instead of days. This significantly improves your DSO as many of your customers will pay their invoices much faster when received upfront in the complete and correct format.
- Encourage your customers to adopt a digital approach:
According to the Billentis Report, The e-invoicing journey 2019-2025, the use of e- invoices is going to quadruple by 2025, making e-invoicing the most efficient way to exchange documents with your business partners. Once both you and your customers digitalize, the entire transaction cycle will be faster, reducing DSO.
“Moving to an e-invoicing process can improve the cash cycle by an average of approximately nine days.”
Reducing DSO to improve ROI
Improved return on investment (ROI) is a result of reducing your DSO. You can easily calculate the impact that reduced DSO can have on your organization by knowing your company’s sales revenue, invoice to cash cycle and weighted average cost of capital (WACC).
Let’s use the following numbers as an example for calculating DSO:
Sales revenue: $500M
Invoice to cash cycle: 45 days
WACC: 12%
By adding these numbers together, your working capital to fund cash cycle would be $61M with a working capital interest cost of $7.3M.
According to our customer data, moving to an e-invoicing process can improve the cash cycle by an average of approximately nine days. The reason for this is because your customer will receive the invoice straight into their AP systems within seconds instead of days.
In addition to reducing the days, what would this significantly improved cash cycle mean for working capital interest savings? Let’s say you send e-invoices that make up 50% of your total sales revenue. By getting paid nine days faster, your company would then realize $739,000 in interest savings alone.
Imagine what your organization could do with the savings it gets from just reducing its DSO!
Start reducing your DSO today
At this point, you have the innovative strategies and best practices to make your entire AR process faster, which will help reduce your DSO. Great! Now, how do you implement these strategies? A good place to start is to invest in a solution that will help you go digital by using cloud-based technology. This will enable you to standardize the output of invoices and connect you with your trading partners for electronic communication. Not only will your AR process be streamlined, but you will also get paid faster.
How so? A few ways:
All of your information will be in one place, removing unnecessary manual work.
It will help you achieve compliance with your customers’ invoicing conditions since the invoice will be in the formats they require.
You will save more money over time. When your customers start adopting a digital approach, they will be able to receive e-invoices, saving everyone time and money.
Reducing DSO is a powerful way to improve your cash flow. Learn how Hewlett Packard Enterprise has reduced their DSO from 7+ days down to 2 hours using Pagero.
Pagero can help you achieve your goals. Our best-in-class solutions help you streamline your order management process and beyond. And with our uniquely global reach, we take care of full invoicing and tax compliance so you don’t have to. Start streamlining your AR process today.
This text was originally published 10 June 2020 and last updated 16 March 2022.
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