How to Reduce Days Sales Outstanding

Days sales outstanding (DSO) gives direct insight into your company’s payment collections. While a low DSO number indicates satisfactory sales collections, a high number shows poor cash flow. Unfortunately, businesses in many industries see high DSO and can experience financial challenges as a result.

In Q3 of 2022, 21 of 211 industries surveyed in the Accounts Receivable and Days Sales Outstanding Industry Report stated that 10% of their aging dollars were over 90 days past due. The report also noted in some industries, such as construction, one-third or more of accounts receivable dollars were paid severely past due. These circumstances can lead to significant issues for companies, including harm to the supply chain and insufficient product flow.

The good news is that inventory and supply chain managers can use various techniques to keep DSO numbers low. Actions like streamlining your invoice processes and implementing a vendor managed inventory software solution can help you collect payments more quickly and strengthen DSO numbers.

What Causes DSO to Increase?

Many factors influence your DSO. Depending on your industry, payment terms can vary in length. For instance, the financial industry often uses lengthy payment processes, while the fuel industry relies on quick payments. Further, small businesses require steady cash flow to manage operational expenses, but major corporations don’t always need immediate pay-offs.

High DSO numbers typically indicate that customers use credit to purchase products or services, and sellers have to wait extended periods to receive the funds. Slow cash retrievals can impact a business’s ability to fund daily operations. By maintaining a low DSO number, you can advance revenue growth and maintain backup funds in case of emergencies.

Here are a few business factors that can impact your DSO:

• Payment terms: If your terms are too broad or lengthy, they could affect your overall DSO. You could require customers to pay within a certain timeframe or use a specific method. These details are typically listed on invoices to give consumers a clear idea of payment expectations.
• Revenue fluctuations: Current balances can make your cash flow seem higher or lower, impacting your DSO on a monthly or annual basis.
• Collections process: Your collections process impacts DSO — you must maintain thorough recording procedures that accurately account for payment collections. For instance, forgetting to mark an expense as complete could cause you to calculate DSO incorrectly.

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6 Ways to Improve DSO

1. Streamline Invoice Processing

Your invoicing procedures play a direct role in your DSO numbers. The longer you wait to send an invoice, the more you extend the payment procedure. An organized and systematic invoice process allows you to send invoices as soon as you finalize a sale.

While many organizations use paper invoicing strategies, these can take much longer than digital ones. You must manually prepare and print the invoices and manage mailing requirements and risks. Email and PDF invoices may be a bit quicker, but still require manual processing that can be time-consuming.

Instead, you can streamline invoicing procedures by using software solutions. A digital format quickens the entire process by automating many manual processes. For instance, invoice software can have features like:

• Customization capabilities
• Automated payment reminders
• Track payment statuses

Overall, digitized invoices simplify the entire procedure, helping customers pay more quickly. In turn, you can improve your DSO numbers.

2. Perform Credit Evaluations

Another way to improve DSO is by using credit evaluations before approving customer sales. You can determine credit trustworthiness before moving forward with sales, ensuring they have sufficient funds. For example, you can analyze cash flow statements or debt-to-income ratios to clarify whether the consumer can meet your payment needs.

Many companies use credit evaluations before offering payment options. In turn, you only complete business with consumers that have your complete trust.

3. Offer a Variety of Payment Options

Providing more payment choices and due dates can reduce days sales outstanding. This approach improves convenience for customers to access different choices, which can positively impact your DSOs. For example, you could accept different credit card brands and bank transfers to meet diverse customer needs. Then, customers can choose the best options for their financial situations, making it more likely they’ll meet payment deadlines.

4. Add Incentives

You can enhance your DSOs by adding incentives for early payments. Discounts or early-bird offers can benefit both you and the consumer.

For example, you could encourage buyers to finalize payments within a 10-day timeframe, and they’ll receive a percentage off the final price. Customers can pay more quickly to receive a lower overall price. In addition, you could implement penalties for late payments. Customers will feel more incentivized to finalize payments and avoid additional fees.

5. Implement a VMI Solution

A vendor managed inventory (VMI) solution can also assist with your DSO numbers. VMI gives managers more control over inventory and payment procedures. You can view detailed, real-time insights into current data and forecast upcoming demand more precisely. These direct analyses of company data can assist with revenue insight. You can then evaluate cash flows, identify areas for improvement, and develop more precise DSO plans to match these needs.

VMI software has features like:

• Automated data monitoring: Automated data connections can minimize delays in data transfers. In turn, you can maintain precise records of all payment procedures and records.
• Order automation: With additional automated features, you can streamline invoices and payment procedures. Eliminate the need for manual invoices and send out automatic reminders instead.

6. Use an Integrated EDI Solution

An electronic data interchange (EDI) solution is another helpful tool for DSO. This data processing solution delivers EDI transactions from your supply chain partners and channels into your enterprise resource planning (ERP) system. It moves paper-based documents like invoices and purchase orders into an electronic format. By automating transactions and manual communications, you can reduce errors and enhance DSO numbers.

EDI solutions automate data exchanges for your organization. For example, invoice software might help streamline manual processes, but not all invoice software types can be integrated with existing systems. Without direct integration, you face additional wait times for invoice processing. Solutions like integrated EDI can bridge the gap between external channels and internal systems, accelerating timelines.

The best EDI solutions can also communicate with financial institutions to automatically process payments. This integration allows for automation on both aspects of financial processing, speeding up the entire invoicing process. The more streamlined your invoicing procedures, the more likely you can improve your DSO numbers.

How an Integrated TrueCommerce EDI Solution Helped Vital Farms Lower Its DSO

A direct example of EDI benefits for DSO is Vital Farms. This food supplier faced difficulties with manually processing invoices and other financial records. The company saw invalid monetary data that impacted its overall DSO and cash flows.

To reduce days sales outstanding, Vital Farms replaced its underperforming EDI system with the TrueCommerce EDI solution for NetSuite ERP. This comprehensive system allowed the company to invoice customers a day after shipment, improving their cash flow. Without manual processes, their payment departments can now focus on higher-priority tasks and boost productivity overall.

Start Reducing Your DSO with Integrated Solutions