4 Questions Your Company Must Ask to Reduce DSO

Reprinted with Permission of ReceivableSavvy

by Ernie Martin

Much has been written on the topic of DSO reduction. While having a variety of voices weigh in on the issue, including our own ebook on DSO reduction, it is equally as important to understand the barriers that prevent companies from effectively reducing DSO. 

I have identified 4 questions that companies must ask if they are to be successful at executing a DSO reduction strategy. Along with these questions, I offer solutions designed to help companies get on track to reducing DSO.

1. Do you have a realistic target DSO?

While a 30-day DSO target may work for one business it may not be achievable for another. Those in your line of business likely have a good idea what DSO is realistic for the industry. Moreover, it will be crucial to determine whether your company has the internal capability to reach the target DSO. By assessing your company’s internal expertise, industry norms and the steps involved in the process, you will begin to understand what DSO target will work for your business. 
It may also be helpful to checkout YCharts (https://ycharts.com), which assists customers in collecting both company and industry data. While this information has usually been used for investment decisions, they also include an average DSO for most industries. Once you have defined a sensible and achievable DSO, you will need to evaluate whether your company has the capability to reach it. 

2. Do you know who is responsible for DSO?

This element is essential to figure out, as many of your organization’s stakeholders will influence the company’s DSO. It should be a significant metric for several departments including, sales, account management, billing and credit management. In addition, senior executives will have an influence on DSO, particularly if performance incentives have been linked to it. Thus, any critical decisions made by senior players when it comes to extending credit to existing or prospective customers will come into play. 

If you have been unable to determine who should be responsible for DSO, your company could benefit from developing a wide-ranging credit policy, which can be used to outline who will be responsible for the different areas in the company particularly as it relates to DSO reduction and management. 

3. Do you know which tools will help reduce DSO?

There are many tools that can be used to reduce DSO but selecting the correct one for your company will be guided by several factors. These factors may include your industry, the sort of customers you serve, the number of invoices you submit monthly and annually – as well as the budget and resources available to integrate the tool you select – will all influence your decision. It will also be important to determine how much reporting will be required as well as who needs to be updated when tracking DSO. 

When deciding on the tools to use it will be helpful to determine the pros and cons of each one, what they will offer in terms of assistance and what will be needed to employ them. A vast range of options are available including invoice submission, which can cover third-party electronic invoicing, small business billing software and enterprise-level billing software. Other solutions that can assist your company in lowering DSO are payment receipt tools such as ACH payments, early payment discounts and cash application software. 

4. Are you leaving DSO responsibility to your customers?

Controlling and handling DSO is not your customers’ responsibility – it is your organization’s. Despite the fact that your customer is obligated to pay you in a timely manner, things may not always go according to plan. Sometimes the payment will be delayed. To handle these situations your company should have a clear and straightforward credit policy in writing. It is important for every customer to understand the terms, which can help avoid situations where a customer pays late because the terms were not clearly laid out. 

Lowering DSO is something that every company should endeavour to do. Although it is useful to understand the steps needed to introduce a DSO reduction plan, it is critical to ask the right questions and properly prepare for the challenges that may keep your organization from achieving those goals. 

 

Ernie Martin is Founder and Managing Director of Receivable Savvy. He brings over 25 years of experience in financial supply chain management, marketing and communications and draws upon his extensive experience to share knowledge and best practices with AR professionals. His resume also boasts time at several well-known brands and companies such as Tungsten Network, Delta Airlines, CIGNA Healthcare and Georgia Pacific as well as a number of years as an independent consultant.