What’s Your DSO?

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If you grant credit to customers, then you have a balance in accounts receivable. DSO stands for Days Sales Outstanding, and this helps you measure how fast your receivables are being converted to cash.

Here’s how to calculate it:

DSO = Accounts receivable balance / Annual net credit sales * 365.

DSO is measured in days and it represents how many days it takes to collect the customer invoice balance and convert it to cash.

Whether the DSO measure is “good” or not varies by industry as well as the terms you’ve set for your clients. If you’ve set your invoices to be due in 30 days and your DSO is 45 days or less, that’s pretty good. If you’ve set your invoices to be due in 10 days and your DSO is 60 days, then you might want to consider a more aggressive collection policy to speed up your cash flow.

Here are some tips to reduce DSO:

1. Invoice clarity.

Make sure your invoices are accurate and clear. Make it clear whom to make the check out to, where to mail it, the due date, and the amount due. All of these features should be easy to find on the invoice.

2. Consider discounts.      

A common discount term is 2/10, net 30. This means the customer can take two percent off their invoice if they pay in 10 days; otherwise they owe the whole amount in 30 days. If you have customers from large companies, discounts are often required by policy to be taken and this can speed up your payments from them.

3. Consider electronic payments.

Going paperless with your invoicing as well as your payment process can speed up the entire billing cycle. Customers getting their bills earlier will also pay earlier.

What’s your DSO? If you need help calculating it, give us a call.

Need an Accounts Receivable Makeover? A Quick, 5-Item Best Practice Checklist

paidTechnology has allowed businesses to make substantial improvements in their customer invoicing processes. The good news is that when you implement these technologies, you will almost always get paid much faster.

If it’s been a few years since the last time you’ve changed your accounts receivable processes, it’s time for a new look. Here are five tips you can use to rate your own invoicing process.

1.     Invoice Creation

The best way to create all of your invoices in by the push of a button from one of about five types of systems that already have all of your data:

  • Time and billing, if you bill hourly
  • Estimating and project management, if you use proposals
  • Customer relations management (CRM) systems that have invoicing as a feature
  • Point of sales systems that track open accounts
  • Accounting system that includes an A/R component

There are a couple of key best-practice concepts to follow at this step:

  • Eliminate any duplicate data entry you can. You should only have to enter your invoicing data in one place, and it should flow to every other system that needs it.
  • Automate as much of the process as possible. Never start in Word or Excel, because this always means duplicate data entry somewhere.
  • Have an easy approval process so someone else can do the data entry if needed.
  • Keep your invoice data real-time so you can benefit from the next step, which is….

2.     Invoice Delivery

How you create your invoice will vary by the type of business you have, but the main thing to make sure of is that the invoice is approved quickly and sent out to the client as soon as the work has been done.

The only way to do this is electronically. If you’re still printing, stuffing, stamping, and mailing you invoices, you’re losing anywhere from two days to nearly a week before your customer even sees the bill. Change that by using email or delivering the invoice electronically.

3.     Invoice Terms

When do you want to get paid? Most people feel it’s realistic to aim for 30 days. But if you set your payment terms to Net 30, you’re more likely to get paid in 45 days, not 30, according to recent research by Xero, where over 12 million small business invoices were reviewed.

Instead set your terms to 13 days or less, Xero suggests, because most small business debtors pay two weeks late. Here is the infographic in case you want to check it out: http://www.xero.com/guides/invoicing/

4.     Payment Method

How does your business rate when it comes to payment options? If all you take is checks, you can add another week’s delay to your payment. Instead, we recommend creating lots of choices for customers, such as taking:

  • Credit and debit cards through MasterCard, Visa, American Express, and Discover
    • You can set up links online (best) or receive a fax or scanned form where you can enter the card into your back office.
  • PayPal
  • ACH for recurring payments that the client agrees to draft from their bank account
  • Checks

Your industry may even have more options. For example, in accounting, Intuit has their Intuit Payment Network (IPN) where small businesses can send requests for and receive money electronically. IPN is far cheaper than PayPal fees, too.

5.     Receipt

When you get paid electronically, it’s in your bank (or your merchant account) within minutes. If you bank online, you can see things immediately now (it’s really amazing!). When you receive a check, you have the overhead of preparing the deposit and making the trip to the bank. If you have hundreds of paper checks, you also have additional bank fees incurred from processing the checks.

If your accounting system interfaces with your bank, then you save a lot of time and money not having to post those transactions.

Invoice-Free Zone

Why not get out of the invoicing business altogether by offering a pay-in-advance option? Your Accounts Receivable balance goes to nothing, to name one of many benefits. Not every industry can adopt this practice, but if you think creatively, you might find some ways you can implement this in your business.

How did your A/R process rate on the 5-point checklist? Got some ideas for improvement? As always, please reach out if you have A/R questions or if we can help you implement your best practice invoicing system.