Calculating your daily sales outstanding (DSO) is a relatively straightforward process. By dividing your accounts receivable by the annual revenue per day, you’ll have a better understanding of the average number of days it takes your business to collect from customers. Logically speaking, a low DSO means that your customers are paying on time, whereas a high DSO indicates your business is missing out on working capital that could be put towards day-to-day operations. In reality, there is more to managing your DSO than just crossing your fingers and crunching the numbers. Here are a few ways you can take control of your DSO by focusing on internal processes.
If you haven’t done so already, now is the time to involve management in your financial KPIs so everyone understands the impact of DSO. If DSO is running high, there are certain areas of your business that you need to address to get to the root of the problem, including the product/service and the customer’s financial status.
Problems with the Product/Service
A company’s operations manager oftentimes holds valuable insight as to why customers are paying late. Is the company meeting customer demand for a product and/or service? Are the products or services being delivered late to the customer? Is there an issue with quality? These are all factors that could create a higher DSO.
For service-based businesses, unhappy clients are more likely to take their time paying an invoice if the service they received was late or unsatisfactory. They figure, “I had to wait long enough for the service to be completed; they can wait a few more days to get paid.” Looking at ways to improve customer satisfaction could involve adding additional staff, streamlining services, or re-prioritizing tasks among employees. A faster, better service can lead to a reduction in the daily sales outstanding.
Customer Financial Health
Maybe the DSO isn’t a reflection of the product or the actual service, but rather how the client is handling their business. Is there someone in your organization who monitors the financial health of your clients? If not, a rising DSO indicates it’s time to start.
In some organizations, it is up to the sales team to vet the right type of customers. A sales representative usually is the first point of contact with a customer. A review of your sales department could tell you if the sales team is doing enough to qualify leads, making sure that the customers your company takes on are financially stable enough to utilize your services.
On the other hand, it may be the person delivering products or services that has the best sense of how the client is doing. A service rep may talk to a point person at that company every day, which would give him or her a better sense of how the client’s company is performing. Any issues should be communicated to the finance department to see if there is something your company could do, or an adjustment you can make, to ensure the client is paying on time, even if they are experiencing a financial difficulty.