Improving AR Management to Improve DSO
Last week, we learned that you can reduce the delta between your Standard DSO and Best Possible DSO by improving your business’ AR policies and overall AR management. This week, we will dive into the strategies and the reasoning behind them.
Aim to have the shortest possible set of payment terms for superior cash flow. Your customers’ Accounts Payable department is unlikely to make payments too far ahead of the payment terms unless asked to pay differently by you for a specific reason. So, if you extended payment terms, such as net 90, you should not expect a Best DSO significantly lower than that.
Conversely, unrealistic payment terms will yield invoices frequently falling “past due”, which is not ideal for planning around your business’ cash flow. Having large portions of invoices classified as past due also does not make your business appear healthy. Set the shortest possible set of payment terms upfront and reduce collection complexities down the line.
Limit variability in payment terms. Don’t let your customer dictate the payment terms as it will naturally lead to higher DSO. Most businesses have multiple terms across their customer base. However, variability in payment terms should be used only as an exception process for customers to negotiate rather than as an open option up front.
Have a standard set of best possible payment terms (see previous point) and limit how much deviation can occur. This will reduce the complexity of term expectations and reduce outliers with longer terms that increase your DSO.
Consider strategies that encourage on-time payment.Offering a small discount can incentivize prompt payment, lowering both Best DSO and Standard DSO. Leverage strategies such as discounts for early payment or late fees for past due payments.
A popular payment policy used by businesses is 1/10 net 30. This payment policy means customers will receive a 1% discount if they pay the bill within the first 10 days, or pay the total within regular terms of 30 days.
Be proactive in engaging with your customers. Your customers can be too busy, distracted, or overwhelmed by their day-to-day tasks to be on top of their payments. Thus, businesses can also improve their AR management by sending out a proactive payment email reminder a week before the payment period ends.
Empower your customer by crafting a reminder cadence and a user-friendly portal that gives them all the information they need to make payments. Once an invoice is past due, businesses can also reduce the time to payment by sending out a payment reminder the first day it is past due and every 15-30 days after that with increasingly persuasive language to encourage payment.
Automate. Technology can provide a solution to the manual inefficiencies where your collections professionals are acting as human workarounds. Automated AR management solutions make this process painless and require no additional work from your AR team. Set up communication rules based on customer payment behaviors, and get one click access to AR metrics and aging reports. Having your workflow streamlined and automated will help you reduce your DSO by becoming more strategic about your collections process and handling a larger volume of invoices without losing efficiency. It can also reduce DSO by offering multiple payment options ranging from accepting installments to online payments.
Accurately track and reference your client’s invoicing and payment history. Having an integrated AR management solution serve as the single source of truth for invoice and collections information can also help reduce your Standard DSO. When you’re selling a good or service, it’s helpful to accurately assess your buyer’s credit before initiating the transaction.
AR SaaS solutions such as YayPay not only provide real time access to invoice statuses and terms, but also your customers’ payment history. This is a valuable set of data that can help you assess the creditworthiness of your customers and predict future payment behavior when forecasting cash flow. YayPay offers a robust Collections Management CRM, or a complete record of customer communication and payment history to help businesses make the appropriate credit decision. Use this information to be diligent and set stricter credit or payment terms for at-risk customers -- once you know who they are.
Ready to use automated solutions to improve your DSO? Contact our team today!