9 Strategies to Reduce DSO and Strengthen Cash Flow
Days sales outstanding (DSO) is a working capital metric that measures how long it takes a company to collect payment on accounts receivable. It’s calculated by dividing accounts receivable by total credit sales and then multiplying by the number of days in the period (such as 30 for a month or 90 for a quarter).
A high DSO means it's taking longer to receive payments, which might lead to cash flow problems. Keep reading to learn how you can reduce DSO and optimize your collections process, helping to ensure you have the working capital you need to cover your accounts payable and other expenses.
9 Ways to Optimize Your Billing Process and Reduce DSO
In general, a DSO under 45 days is considered low, and anything over 45 days is considered high. However, some industries may naturally experience higher or lower DSOs than others. It’s best to track your days sales outstanding over time to look for trends and compare it to industry benchmarks before deciding if it’s time to take action.
If your data is trending upward, here are some ways to reduce your DSO metric and improve the order-to-cash cycle overall.
1. Send Invoices Quickly
Traditionally, the DSO “clock” doesn’t start until an invoice is sent. However, some companies choose to include unbilled accounts receivable (unbilled A/R) in their DSO calculation, meaning any time that passes between a sale and an invoice being sent would affect the DSO metric.
Whether your company includes unbilled A/R or not, one fact remains the same: Your invoicing process affects the overall order-to-cash cycle. After all, your customer can’t pay until they’ve received an invoice.
For example, let’s say you made a sale on September 5 but didn’t send an invoice until 30 days later on October 5. If it takes the customer 30 days to pay the invoice, the entire process from sale to cash would be 60 days.
If this sounds familiar, consider why there’s a delay between the sale and the invoice. Is it because of manual processes that take up too much time? Consider adding automation to streamline invoice creation.
Of course, there are certainly circumstances where invoices can’t be sent earlier. Perhaps the customer pays you an hourly rate, and you can’t bill for the service until after the work has been completed. In those situations, you’ll want to look for another way to optimize your billing process.
2. Automate Payment Reminders
Sometimes customers haven’t paid an outstanding invoice because they simply forgot. Try sending automated follow-ups to nudge customers with an approaching due date or a past due invoice.
For example, you can configure your billing software to send reminder emails on a certain schedule, such as five days and one day before an invoice is due.
This saves your accounts receivable department from having to babysit upcoming due dates and send follow-up messages manually.
3. Change Your Net Terms
Another way to reduce DSO is to shorten your payment terms. If you currently extend 45-day net terms, you could receive payment 15 days sooner or more by trimming it to 30-day net terms.
However, this is only an option for some companies. For example, if your industry’s standard net terms are 60 days, you could put a strain on customer relationships by deviating from what’s expected. You may also have contractual agreements in place with a customer’s accounts payable or procurement department, which would prevent you from making changes.
4. Give Early Payment Discounts
Encourage faster payments by offering an early payment discount. This is a good alternative if you can’t change your net terms. Instead of shortening the payment terms, incentivize customers to pay sooner.
Keep in mind, the discount will impact your profit margin. You’ll want to determine if the discount is more cost-effective than the interest you’d pay on financing to cover temporary cash flow problems. In addition, you can create policies around which customers or invoice amounts will be eligible for a discount.
This strategy is best when you have software in place that dynamically adjusts an invoice amount based on the discount parameters. Otherwise, if early payment discounts lead to manual work or confusion for your accounts receivable team, it may not be worth the cash flow gains.
5. Implement a Late Payment Policy
Ask yourself two questions:
Do you currently have a late payment policy?
Are you enforcing your late payment policy?
If late customer payments aren’t subjected to any consequences, you may be sending a message that your due dates are merely suggestions. Even when a company has a late payment policy, it may be inconsistent about enforcing it.
Make sure your late payment policy is fair and communicated well in your client contracts and on invoices. You may even want to include a grace period before any late fees are added to an account. This can help avoid surprises and uncomfortable conversations with customers.
Also, have a strong internal process (that’s automated if possible) so that enforcement is simple and straightforward for your team.
6. Provide Electronic Payment Options
Make it easier for customers to settle their invoices by providing multiple electronic payment methods, such as credit cards, ACH transactions, digital wallets, or embedded finance. In addition to simplifying the process, electronic payments clear more quickly and require less processing than paper checks sent by mail.
7. Set Up Autopay
For recurring orders or services that require monthly, quarterly, or annual billing, offer customers an autopay option. This reduces the risk of late payments and ensures a consistent cash conversion cycle.
8. Offer Buy Now, Pay Later
Buy now, pay later (BNPL) is a type of embedded finance that lets you offer extended payment terms to your customers without taking on credit risk. Essentially, when you partner with a BNPL provider, they give you the invoice amount upfront, and your customer benefits from net terms or installment payments.
For example, with BackdPayments, it’s easy to offer B2B buy now, pay later. Customers can receive either:
Integrated net terms of 30, 45, 60, or 90 right at your point of sale or on your invoice
The ability to pay over time with terms up to 24 months
Both options are designed specifically for B2B use cases, including approval amounts of $1,000 to $1.5 million. Plus, instant approvals are available on amounts up to $50,000.*
9. Audit Your Accounts Receivable Management Process
Review your accounts receivable process for potential delays that may be increasing your DSO despite timely payments. Consider the following questions:
Are there manual bottlenecks keeping payments from being logged quickly?
Are payments being received that can’t be matched to the right invoice?
Do data entry errors lead to inaccurate tracking?
Look for ways to digitize or automate accounts receivable management to help reconcile payments faster and stop the DSO clock.
Simplify Your Collections Process With Buy Now, Pay Later
While there are multiple strategies you can use to reduce DSO and optimize your collections process, offering buy now, pay later is a win-win for you and your customers. It allows you to extend net terms and installment plans without absorbing the credit risk or waiting for payment. Your customer gets the flexibility they need while you get paid upfront.
Partner with BackdPayments to begin offering BNPL that’s designed specifically for B2B transactions.
*Decisions and funding may take additional time and not be same-day. Additional information may be required. Time to receive funds varies based upon your financial institution's receiving schedule and operating hours.
