What is The Most Effective Way to Improve your DSO and Cash Flow?
May 18, 2022
Your Days Sales Outstanding (DSO) is a crucial financial ratio to track. Put simply, it is the number of days it takes your clients to pay your invoices.
Your DSO calculation comes from a ratio between your sales and your A/R. You can read more about the most accurate formula to calculate your dso here or check out our free spreadsheet to calculate, interpret and improve it!
A low DSO is good, as it suggests a fast credit sales to payment turnaround. A high DSO, on the other hand, means bad news. Because you don’t have much cash inflow, it can threaten your company’s liquidity.
Reducing your DSO should therefore be a priority in any business. By doing so, you’ll reduce your risks of running into cash flow problems.
Keep reading to find out the best ways to improve your DSO.
At Upflow, we believe it's all about automation! Our in-house A/R software can help you lower your DSO efficiently by automating your collection process and help you get paid faster.
What Impact Does Your DSO Have on Your Cash Flow?
Before jumping into ways to improve your days sales outstanding, let’s take a moment to really understand why it’s important.
Let’s consider a situation where your DSO is high - that is, higher than your industry’s standard payment terms.
Concretely, your clients take too much time to pay you. It is a problem because it directly impacts your cash flow, as it’s money you don’t have yet.
Since you don’t have it, you cannot use the cash to pay your providers on time, which can lead to late payment fees for you. When unpaid invoices and accounts payable pile up, it creates an unbalance that can threaten your company’s viability.
A high DSO reduces your working capital, which means less cash for your expenses, debt repayments, and investments. Ultimately, it can lead to bankruptcy.
What you’re doing is basically giving free customer credits, with no interest to compensate for your credit risk. Because there is a risk that your unpaid invoices remain unpaid forever, especially since you don’t give credit approvals. After all, that’s why your A/R are a liability.
On the other hand, a lower DSO means improved liquidity and leads to better cash flow management, as you know you can expect prompt payments. It’s also a mark of customer satisfaction since happy customers tend to pay their invoices within the given amount of time.
If a lower DSO sounds good to you: keep reading! Next, we’re giving you concrete tips to start improving your DSO today.
Need help calculating your DSO? Check out our free metric spreadsheet.
5 Ways to Start Improving Your DSO and Cash Flow Right Away.
The main idea about reducing your DSO is simple: you need to streamline your payment and invoicing process.
Because we’re talking about customers’ payment time here, it makes sense to look at what your current collection processes are:
Do you make it easy for your customers to pay you?
Do you have an established strategy to stay on top of your collection?
Do you know what other KPIs influence your DSO?
If you can't answer yes to the above (or you’re not sure): don’t worry. We’re about to give you the details on how exactly to do that.
Be Proactive about your Accounts Receivable Collection to Lower your DSO.
Staying on top of your A/R collection process is the number one way to improve your DSO. By making it a priority for you, your team, and even your whole company, you make it a priority for your customers, too.
Since consistency is key here, we suggest you set up reminders for your whole team to follow through on your invoices. That entails sending invoices on time, but also follow-up emails, etc. (We’ll see more about this after.)
If that sounds like a lot, remember that you can use automation to take some of the burden off your team (especially the repetitive ones!). An A/R software like Upflow allows you to set up different reminders for your team, and offers a space to centralize all the follow-through notes on a case.
With a tool like this, you can easily involve more people in the collection process, something we highly recommend.
Your sales team for example should focus less on net sales and more on cash payments, which actually influences your company’s cash flow positively. You can also involve your accounts managers in the process by asking them to send an email to their contact when an invoice is unpaid.
At Upflow for instance, we ask our sales representatives to collect the first invoice with new customers. It ensures that the payment is really collected and makes for a smooth transition with our accounting department. If any dispute arises, it can also be easily cleared up.
Is your DSO high and your late payments piling-up? Have a look at our free guide with tips to get paid on time!
Optimize Your Billing Processes to Improve Cash Flow.
Your billing process is a key element to lowering your DSO and improving your cash flow. Making sure that your clients receive the right information at the right time is essential to get paid on time.
Here is the information that must be on your invoices and payment reminders:
invoice amount, and eventual late payments fees,
Invoice due date (you can also highlight the x number of days it has been due),
Your company’s name and your contact info,
Your payment terms,
Your payment options.
It might seem obvious, but too often, invoices are sent without this information and cannot be paid or tracked down properly.
Multiple payment options are also encouraged. Make sure you include specific instructions for each i.e. payment via credit cards, bank transfers, international transfers, etc.
When using Upflow, your customers have access to a specific portal that offers different payment options to choose from.
The easier you make it for your clients to pay you, the more likely they are to pay you on time.
Establish A Payment Reminder Strategy.
Another important piece of the puzzle is to send timely payment reminders to your clients. It is in line with the concept of making it easier for them, and it benefits you, too. Win-win.
Depending on your payment terms, you can draw up a payment reminder calendar that looks more or less like this:
Each time, increase the assertiveness of your tone - but always remain polite.
We also recommend you switch between different mediums and contact points. For instance, if your emails are left unanswered, you can pick up the phone and ensure they have been received.
That’s also when you’d ask a sales representative to check on their contact and make sure all is well.
If you want to be more effective, you can even design different email workflows depending on the different client subgroups you have:
Corporate / SMBs,
Pay by card / by transfer / by heck,
New customers / Established clients
First time late payers / recurring late payers
On Upflow, you can set up these different scenario quickly and let them run in the background. Automation for the win!
Check out The Complete Guide for Payment Reminders for Your B2B Business to learn more.
Review Your Payment Terms to Reduce DSO.
What’s a good DSO? First, there are benchmarks where you can find the average dso per industry. Second: that's all relative.
If you have a 30-days payment term, then a DSO at 30 days (or close to) is great.
If you ask for immediate payment and your DSO is at 30 on the other hand, that’s not as good. In this case, you want your DSO to be as close to 0 as possible.
In brief, a good DSO is one that’s close to your payment terms. Therefore to lower it, you need to have a look at your current payment and credit terms, but also your payment options.
Look at your current credit policy. If you have a 90-days interest-free payment but your DSO is higher than what you’d like, you might want to review it. Payment flexibility might be appreciated by your customers, but it shouldn't threaten your company’s cash flow.
If you’re not sure about what’s best for your clients, ask! Different clients can have different terms which can be negotiated on a case-by-case basis.
Another way to reduce your DSO is to incentivize early payment. By offering incentives, you encourage your clients to pay sooner rather than later. Payment discounts are a great way to encourage upfront payments for example.
On the other side of the spectrum, you have late payers. For some of them, payments arrive late because they forget. That’s why a reminder is always handy.
You can also encourage them to automate their payment - that’s especially relevant if you have a subscription-based business.
For others, it might be because they have cash flow problems. Offering them a payment plan would be helpful for them and for you. When it comes to unpaid invoices, the hardest part is to find the root of the problem. Once you’ve figured it out, you can find solutions that satisfy each party.
Which is why, once more, being proactive about your A/R is a game changer. By sending automated and personalized emails, you ensure that there is always a clear channel of communication between you and your customers.
See Beyond Your Days Sales Outstanding.
There is more to your accounts receivable’s health than your DSO. While it’s a great metric that needs to be monitored, it’s not the end-all-be-all of your company’s cash flow.
For one, your DSO attributes the same weight to all your invoices. You might collect from your smaller clients quickly, but your bigger accounts might take more time (which would indicate that you need to review your payment terms with them.)
In order to get an accurate representation of your collection process, you need more KPIs, such as
Your Collection Effectiveness Index (CEI): it measures in percentage your ability to get paid over a given period (usually a month). You want this to be as close to 100% as possible, and always above 80%.
Your CEI is an internal measure of your collection effectiveness. While your DSO calculates the average number of days it takes to get paid, your CEI takes into account the amount of the unpaid invoices.
Your A/R aging reports: a visual representation of your unpaid invoices that shows you when your invoices are due, in different time brackets. You can have a 0-30 days bracket, 30-60 days one, and a +60 days. We recommend focusing on reducing the second one specifically, as it indicates a rising cash collection problem.
Your billing cohorts: an overview metric to see how well your company collects cash over time. It’s good to monitor it over time to see how your collection processes evolve.
These KPIs calculation can easily be automated using - you guessed it! - accounts receivable software. Upflow offers a private dashboard with these metrics (and more) which you can consult in a few clicks. Since we integrate with third party apps like your billing software, you also know that your data is always up-to-date.
Check out our article on the 9 Key Financial Metrics You Should Track.
We’ve seen some of the ways you can start improving your DSO. Before you get overwhelmed with everything there is to do, let’s see the most effective way you can lower your DSO. It all falls down to one word: automation.
The Best Way to Lower Your DSO: Automating Your A/R.
If you feel like the tasks to lower your DSO are a lot, you are right.
In between following up with individual clients, tracking KPIs, and optimizing your processes, there is little time for anything else, let alone for long-term strategic thinking.
The good news is that automation can help you. By automating your most time-consuming tasks, A/R software frees up your time for tasks with higher added value. Less copying and pasting the same email, more strategy!
With Upflow, you can send automated payment reminders to your clients. You can design different workflows, write the email once (or use one of our templates) and voilà! It’s all set up to work in the background.
Automating doesn’t mean being generic: you can personalize your emails to your clients through our interface.
When it comes to tracking your DSO metrics, an A/R tool will generally show you a dashboard with several KPIs which are automatically calculated. You can easily track your DSO, CEI, and other important collection metrics on it, and even customize your reports.
It’s also less error-prone as it’s done automatically and all in one place. Upflow integrates with your CRM, billing software, and other third-party apps, which provides you with the latest data at all times.
Last but not least, using an online tool also means facilitating collaboration at the scale of your team and your company.
You can set up internal reminders and attribute tasks to other team members. It’s ideal to know who is working on which account and make sure everyone is taken care of. Since you can have an unlimited number of access, you can even invite your sales team.
By automating your collection workflows, A/R software like Upflow will make your whole process more efficient. It means getting faster payments, improving your cash flow, and having more time to dedicate to your long term growth - every CFO’s dream.
Want to give Upflow a try? Try our free Discover Plan.
Your DSO can make or break your business. Where a low DSO means great liquidity, a high DSO can endanger your company’s cash flow and sustainability.
To reduce your DSO, you need to look at your collection process as a whole. You want your invoicing and billing processes to make it easy for your clients to pay you
Setting up various payment reminder workflows will help reduce your DSO. Make it a priority for you and it will become a priority for your clients.
If your DSO is too high, look at your payment and credit terms. Changing those will have a huge impact on how fast you get paid.
While DSO metrics are great to track, you should also keep an eye on your CEI, aging report, and billing cohort.
The best way to reduce your DSO is through automation. By letting software do the heavy lifting, you can focus on the accounts that really deserve your attention as a CFO. It’s also more time for strategy!