8 Steps to Reduce DSO

reduce dso

DSO or Days Sales Outstanding, is the length of time it takes customers to pay their invoices. Most organisations that extend credit to their customers strive to keep their DSO as low as possible.

Here are 8 steps to help reduce DSO based on experience across multiple countries and based on discussions with other experts in the field.

1. Ensure Accurate and Timely Billing

It goes without saying that the longer it takes for a customer to receive their invoice, the longer it will take for you to get paid.

In order to get paid as soon as possible, you must have a solid system in place to ensure invoices are generated and distributed as soon as possible after goods have been delivered, or services rendered.

It is also vital that all information on invoices is as accurate as possible. Inaccurate information leads to invoice queries which leads to payment delays. The following checklist is useful:

  • Correct customer invoiced
  • Delivery/Service location correctly specified
  • Right product/services listed
  • At the correct prices
  • Including discounts (if any)
  • Valid purchase order number quoted (if required)

Getting these right is often more challenging than you might think and I will address this in another blog post.

Of course, delivering invoices electronically greatly reduces the time it takes invoices to get to customers (in some cases by as much as 5 days).

2. Comply with Customer’s Invoicing Requirements

One of the most if not the most important factors in getting paid on time is to fully comply with a customer’s invoicing requirements.

More and more customers are using purchase order numbers and if your invoice does not refer to a valid purchase order, it is simply not going to get paid.

When a new account is opened for a customer, make sure that you obtain detailed instructions on the customer’s supplier payment process, e.g.

  • Where invoices should be sent
  • How they should be delivered (printed, electronic delivery, EDI, file format etc.)
  • Addresses that may be required
  • Whether or not purchase order numbers are required
  • Key contacts and contact details if any issues do arise
  • When payments are typically made
  • What is necessary to be included in the payment run

3. Offer Early Payment Incentives and/or Late Payment Penalties

Best practice on credit control suggests that late penalties should be applied to overdue invoices.

While this works in some countries, it can be very problematic in others. In a worst case scenario, a customer may reluctantly pay interest on an outstanding amount, but may never place another order. This could have serious implications if it is an important customer in terms of value, and if the customer generally has a good payment record.

An alternative is to provide incentives for early payment. For example, in Canada it is quite common to have 2% 10, i.e. a discount of 2% applies if payment is made within 10 days.

Many customers in Canada strive to achieve payment discounts and therefore pay early. This has the effect of releasing cash into your business.

4. Have Clear Payment Terms

In some cases, part of the problem for slow payment is due to confusion with your payment terms. Be sure that they are clearly and simply stated.

They should be set out in a contract signed by the customer before any products or services are supplied. The payment terms should then be repeated on each invoice, ideally with a due date (the ability to do this will depend on your invoicing software).

5. Do Due Diligence when Extending Credit

You should always assess new customers as best you can if you will be selling to them on credit. It is better to find out now rather than later that a customer has a bad name for making payments. This can be done in a number of ways:

  • Run Credit Reports – Use your preferred credit information provider to check for any judgements against the company, check out what directorships are held by the company owners/directors and the fate of those companies, and the overall rating assigned by the credit information provider.
  • Verify that you are invoicing the correct legal entity. This is hugely important should the matter go legal. You must know exactly who you are giving your goods/services to!
  • Do your homework – Check out their website to assess the size of the company and who they are in business with. Look at blogs, forums and their social profiles to see if they are receiving any negative feedback from their customers.

6. Walk Away from Bad Customers

This is the hardest step for any business as it goes against their instinct. However, slow paying customers can cost more than they are worth. Determine the cost of chasing up these late payers and the interest you could be earning on the money extended as credit to them against the value of their custom and you can see if they are worth keeping.

7. Be Proactive in Reminding Customers when Payments are Due

You need to ensure you are in regular communication with your customers. You should Know Your Customer (KYC) and their payment system. Know who is responsible for the payments, if they have a certain payment date each month, frequency of payment runs etc.

Send gentle reminders before payment runs and call as soon as a payment is overdue to check when payment will be received.

8. Adhere to a Cut-off Point to Send a Debt for External Collection

This is a last resort and hopefully if you have followed the other tips you won’t end up in this position.

It is important that if your terms and conditions state that you will send an overdue amount for collection (to a collection agency or legal firm), that you send it on the specified date.

This makes it easier for the collection agency to collect the debt (before it becomes too old to collect effectively), and also shows to customers that you are serious about getting paid on time for your goods or services.

A word of warning! Make sure that the criteria for sending debt for collection does not include key customers who may have customised credit terms.

It is also important that the collection agency used is involved early but does not open with threats of legal action – that should be reserved for later in the process. The collection agency should request payment in a calm, friendly, co-operative manner before any escalation towards legal action occurs.

I hope that you find these 8 tips useful. If you would like to share any others please feel free to contact me.

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Finbarr McCarthy

Finbarr has extensive international experience working with clients to improve their invoice handling processes. This applies to both inbound (invoices received from suppliers) and outbound (sending invoices to customers). Working with accounts receivable and accounts payable functions gives him a unique perspective because he can quickly assess the impacts of internal procedural or system changes on suppliers or customers, and how these changes will be perceived. His work has resulted in faster invoice throughput, lower costs and reductions in time taken to get invoices paid. More importantly, his work leads to better supplier-customer relationships with significant benefits for all parties.

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