DSO: 5 Essential Steps to reduce Your DSO
Nov 25, 2021
DSO - for Days Sales Outstanding - is an important KPI to keep an eye on especially in fast-growing SaaS companies. It represents the number of days it takes your invoices to be paid by your clients. It, therefore, has an influence on your company’s cash flow. It also signals the efficiency of your cash management process.
There are 2 ways to calculate Days Sales Outstanding:
The simple method: a simple formula that calculates the average number of days it takes for your customers to pay your company.
The countback method: a more complicated and accurate way to find your DSO, where you go back month-by-month over a period of time.
Need help calculating your DSO? Check out our free spreadsheet that helps you calculate, interpret and reduce it!
The “3rd option” to calculate your Days Sales Outstanding would be to use automated software: it gives you accurate, real-time data. That’s what most CFO and finance professionals tend to use.
For more information about calculating your DSO check out our step-by-step guide to calculating Days Sales Outstanding
Regardless of how you calculate your DSO, one thing is important, maintaining a lower DSO is usually better for the health of the company. A low DSO means that you are getting paid quickly by your customers. It’s also a good indicator of the efficiency of your accounts receivable process. However, it's important not to become fixated on lowering DSO by implementing payment policies that are too strict. This could do more harm than good. On the other hand, a high DSO can be an early warning sign that the company has cash flow problems.
So, how can you reduce your DSO?
What are the steps you need to take to have a low DSO while maintaining a good customer relationship?
What Factors can affect DSO?
What are the other KPIs you need to watch out for?
Before you read on to find out the answers, take a moment to calculate your own DSO. You need to start somewhere and having it will give you a benchmark to work towards.
Already have your Days Sales Outstanding? Let’s find out the 5 essential steps you must take to reduce it.
Having a hard time computing essential A/R metrics like DSO, have a look at our free spreadsheet!
1 - Maintain an efficient invoicing process
Invoicing is at the heart of every business. Without an adequate cash collection process, there is no business - everyone knows that. Your invoicing process should therefore be at the forefront of your mind when it comes to lowering your DSO.
Ideally, you should be proactive throughout the entire billing process. That means not only sending invoices on time but in addition, setting up follow-up reminders for your team.
Another way to reduce your DSO is to pay attention to the quality of the information you send:
Do your invoices come with a clear due date?
Are your payment terms written on each invoice?
Do you double-check the amount of each invoice, as well as the person it is sent to?
These might seem obvious, but these seemingly small actions can make a big difference to your Days Sales Outstanding. This is especially true if you send invoices manually and use spreadsheets to track them.
2 - Create a convenient payment process
If late payments are becoming an issue for your business, it may be because it's difficult for your customers to pay you. This will be reflected in your DSO.
A clear, convenient payment process, on the other hand, will help you improve your DSO. The goal is to make it as easy as possible for your clients to pay you.
This looks like:
Offering multiple payment methods: let your customers choose between paying you through check, bank transfer or, by using a Debit or Credit Card. Credit or Debit Card, or even by sending you a check.
Making sure they have the right information at the right time. As previously mentioned: checking that your client has all the necessary info to pay you is key. Make sure to include your bank details or a payment link to your invoices, as well as the due date.
3 - Incentivize early payment
You should aim to reduce your DSO, but not at all costs: your relationship with your clients needs to be protected! Good customer service can include for instance more flexible payment terms for bigger or older clients.
Another way to improve your DSO while improving your customer relationships is to offer them rewards for early payment. Since upfront payments will allow you to improve your Accounts Receivable and your cash flow, it can be worth investigating ways to incentivize it.
This can look like offering them a 5 or 10% discount. The incentive amount should vary based on how much the extra liquidity is worth to you. You could also include a bonus (service or product) to customers who pay before an invoice is due.
Whichever option you decide on, make sure your payment terms are clearly stated on your invoices! And remember that rewarding customers for upfront payment or early payment is better than penalizing them for past due invoices.
4 - Automate your Accounts Receivable Process
If you want to lower your Days Sales Outstanding, you need to take a proactive approach to your Accounts Receivable process. While that is possible to achieve by using spreadsheets and a team of dedicated people to follow up on unpaid invoices, it is much simpler (and more accurate) to use account receivable software.
An A/R software allows you to create efficient workflows for your billing process. Invoices can be sent automatically and you can schedule personalized reminders to follow up on them. Since part of the process uses automation, you can then focus your energy on high-risk accounts with outstanding amounts of more than 30-60 days. what will make a bigger impact - like focusing on improving your DSO.
Upflow is an accounts receivable solution that will help you to set up the previous steps easily. It offers real-time information about invoices as well as different payment options for your customers.
If you’re serious about reducing your DSO, you’ll at least want to have a look! Check out our Live Product Tour here!
5 - Track other important metrics to reduce DSO
While your DSO is one of the most important metrics to track, it is by no means the only metric you should concentrate on. If you want to improve your accounts receivable process at large, you’ll also want to look at:
Your A/R aging reports: a visual representation of your A/R gathered by time-to-due date. Focus on the 30-60 overdue days bracket in particular as it is a strong indicator of an escalating cash collection problem.
Your Collection Effectiveness Index:(CEI) measures your ability to get funds from your customers at a given time. The closer it is to 100%, the better it is - try to keep it above 80% at all times!
Your Billing Cohorts: this metric ties it all together by analyzing the percentage of revenue your company actually collects over time. You can see if your cash collection processes are working and how they evolve.
Improving these other metrics will also lead to improving your Days Sales Outstanding as well as your cash flow- they are all connected!
Good news, we offer a free spreadsheet to calculate these metrics!
There are 5 keys to improving your DSO:
Maintain an efficient invoicing process,
Create a convenient payment process,
Incentivize early payment,
Automate your Accounts Receivable process,
Look at other metrics! Lowering your DSO won't happen overnight, it's a long-term practice that requires adapting your internal A/R and invoicing processes. Now that you’ve read this comprehensive article, keep the momentum going by being proactive and testing these different strategies.