Top 5 Strategies to Reduce Days Sales Outstanding (DSO)

Published On: March 28th, 2023Categories: 3rd Party Collections, Business Credit Reports, Commercial Collections
Day Sales Outstanding | Bravo Recovery

Navigating through tough economic downturns can be challenging for any business, and maintaining a healthy cash-flow is extremely crucial for financial stability

  • Days Sales Outstanding (DSO) is a key metric that measures how long it takes for a business to collect payments from its customers after a sale. A high DSO indicates that the business is struggling to convert its sales into cash, which can affect its liquidity, profitability and growth. A low DSO indicates that the business is efficient in managing its receivables and has a healthy cash flow.

In this post, we will discuss the top 5 strategies for reducing DSO in commercial credit management.

In tough economic times, when customers may face financial difficulties or delays in paying their invoices, DSO can increase significantly and pose a serious challenge for commercial credit managers. Therefore, it is essential to adopt effective strategies to reduce DSO and optimize the cash conversion cycle.

Here are some of the best practices that can help you achieve this goal:

  1. Implement a robust and proactive credit policy. A credit policy is a set of guidelines and procedures that define how you grant credit to your customers, how you monitor their creditworthiness and payment behavior, and how you handle overdue accounts. A well-defined credit policy is essential for managing DSO effectively. A proactive credit policy means that you assess the credit risk of each customer before extending credit, set appropriate credit limits and terms based on their risk profile, and communicate them clearly to your customers. By adhering to a stringent credit policy, businesses can minimize the risk of late payments and defaults while fostering healthy relationships with customers.

      Things to consider:

  • Reach out to customers before payment deadlines to provide reminders and support.
  • Address late payments immediately to minimize their impact on your DSO.
  1. Automate your invoicing and collection processes. Manual invoicing and collection processes can be time-consuming, error-prone, and inefficient. Automating these processes can help you speed up your billing cycle, reduce errors and discrepancies, improve accuracy and transparency, and enhance customer satisfaction. Ensuring that invoices are accurate, clear, and sent promptly can also help reduce your DSO. You can use software tools or cloud-based platforms that allow you to generate, send and track invoices electronically, send automated reminders and notifications to your customers, integrate with your accounting system and payment methods, and provide real-time visibility into your receivables status.

      Things to consider:

  • Include clear payment instructions and terms on the invoices.
  • Send invoices promptly upon completion of the sale or service.
  1. Offer incentives for early or prompt payment. One of the most effective ways to encourage your customers to pay faster is to offer them incentives for doing so. Develop tiered early payment incentives based on the payment timeline. And clearly communicate the available discounts to customers. These incentives can be in the form of discounts, rebates, rewards or loyalty programs. For example, you can offer a 2% discount if the customer pays within 10 days of the invoice date, or a 5% rebate if the customer pays within 30 days of the invoice date.

      Things to consider:

  • You can also offer free shipping, extended warranties or other benefits for customers who pay on time or in advance.
  • Monitor the effectiveness of early payment incentives and adjust as necessary.
  1. Negotiate with your customers for better payment terms. Sometimes, your customers may have valid reasons for delaying their payments, such as cash flow problems, seasonal fluctuations or unexpected expenses. In such cases, instead of taking a rigid or punitive approach, you can try to negotiate with them for better payment terms that suit both parties. For example, you can offer them a payment plan that allows them to pay in installments over a period of time, or a trade credit that allows them to defer payment until they sell their goods or services. By addressing payment issues proactively, businesses can mitigate the impact of late payments on DSO and maintain a healthy cash-flow. You can also ask them to provide collateral or guarantees to secure their payment obligations.

      Things to consider:

  • Reach out to customers before payment deadlines to provide reminders and support.
  • Address late payments immediately to minimize their impact on your DSO.
  1. Escalate your collection efforts for delinquent accounts. Despite your best efforts, some customers may still fail to pay their invoices on time or at all. In such cases, you need to escalate your collection efforts and take appropriate actions to recover your money. These actions may include sending more frequent and urgent reminders and notices to your customers, contacting them by phone or email, involving senior management or third-party intermediaries in the communication process, imposing late fees or interest charges on overdue accounts, suspending or terminating the delivery of goods or services until payment is received, reporting the delinquency to credit bureaus or agencies, or taking legal action if necessary. Optimizing your collection strategies is a must.

      Things to consider:

  • Prioritize collections efforts based on customer risk and payment history.
  • Train collections teams to effectively manage customer relationships and negotiate payment terms.

By following these strategies, you can reduce your DSO and improve your cash flow in tough economic times. However, you should also remember that reducing DSO is not an end in itself, but a means to achieve better financial performance and customer relationships. Therefore, you should always balance your collection efforts with your customer service and retention goals and strive to create a win-win situation for both you and your customers.

Please Note – if you do not have this type of internal support because you are growing too fast or you cannot find help fast enough, that is when you may want to look closer at third-party intermediaries like Bravo Recovery. Give us a call. We’d love to chat!