A low days sales outstanding (DSO) ensures a steady cash flow and access to working capital. Accounts receivable (AR) teams can reduce DSO and unclog that flow with a few easy steps.

One of the key metrics businesses measure to assess their own success is DSO. DSO is the average number of days it takes to collect payments on invoices sent to customers. It is calculated using the following formula:

DSO = (AR / Total Credit Sales) x Number of Days

DSO is a strong indicator of a company’s health because it reflects incoming revenues, the quality of the business’s product or services and customer satisfaction. A low DSO means that payments come in quickly, allowing the business to maintain a steady cash flow and ongoing liquidity. A good DSO varies by industry, but generally, companies should aim for a DSO of less than 45 days. Anything more than that can lead to cash flow issues.

Riya Grover, CEO of Sequence, a provider of automated billing and invoicing software for B2B teams, notes, “For companies looking at top-line revenue growth, DSO, not just the number of contracts signed, is an important indicator of revenue that will actually hit the books. DSO can help answer the question of whether the product is delivering and customers are being served.”

Best practices to reduce DSO

Fortunately, companies burdened with a high DSO can quickly deploy some best practices to reduce it and improve their cash flow and access to working capital:

• Use automated invoicing solutions. Invoices sent manually often have errors and inconsistencies. Automated solutions — ideally with AI technology — ensure accuracy and reliability, facilitating more timely payments. These solutions automatically extract data from the business’s accounting system to match purchase orders and receipts with the right invoice numbers. They then use the extracted data to generate invoices and send them directly to the customer, who can pay them in seconds by clicking a link or forwarding them to their accounts payable (AP) system. Invoices are sent at the same time, in the same format, through the same channel every time.

• Spell out payment terms and due dates clearly on invoices and contracts. Invoicing solutions can be set to include this information automatically. AI-enabled functionality can make this information even more personalized and targeted to individual customers or customer segments.

• Shorten payment terms. Longer payment terms make it easier for missed invoices and payments to go unnoticed. Before changing terms, though, make sure the adjustments align with industry standards. And of course, notify customers of the impending change before enacting it.

• Create a consistent system of reminding customers of due dates and alerting them to late payments. Use standard email templates or automated solutions and offer multiple payment options — cards, e-checks, PayPal, etc. Have a standardized collections process — ideally an automated one.

• Update customer contact information regularly. If an automated solution is in place, it can extract this data from invoices and contracts and enter it into customer databases and management systems.

• Set credit limits. Identify a threshold for the credit scores customers must have before they can receive credit. Like customer contact data, credit information should be updated regularly. To refine this practice further, AI can be used to assess customers’ credit risk.

• Offer early payment discounts. Many businesses offer their customers a discount of 1-2% for paying an invoice within the first ten days of receipt. The benefits of this practice, improved cash flow and increased working capital, outweigh the cost. Discounting can also strengthen customer relationships and boost retention.

• Follow up on customer disputes promptly. Some companies ignore disputes until they become major issues. Payments can be delayed or even stopped if disputes go unresolved. Following a standardized process, staff (or technology) should work through these disputes as prioritized and keep sales and customer service teams informed about them.

• Segment customers by payment behavior, product use and/or other defining characteristics, and customize communications accordingly. AI can facilitate and enhance this practice.

• Talk to customers who consistently pay late. Sometimes, just a few late-paying customers can drive up DSO significantly. Have collections staff work with those customers to determine why payments are late. If the customer does not have valid reasons or is teetering on business failure, consider removing them from your customer list.

Automated solutions and AI

Some companies that have automated their AR processes use solutions that incorporate AI technology. Among other functions, AI can:

• Capture contract and sales data in real time.

• Extract data to perform auto-billing and manage receivables.

• Send highly personalized reminders to customers.

• Segment customers by channel, time, invoices overdue, number of days outstanding and customer characteristics, among other categories.

• Invoice customers on exactly the terms they expect.

• Detect patterns in customers’ payment behavior.

• Notice anomalies in customer behavior that could indicate fraud or potential mis-payments in real time.

• Automate collections.

• Analyze customers’ credit to determine limits.

• Forecast cash flow accurately and make relevant recommendations.

The last item on this list may be the most important, since “cashflow is the lifeblood of any business,” Steve Young, CEO of Square 9, an intelligent information management platform for business processes, observes. “Getting paid quickly and accurately keeps your business in strong overall health.” Shrinking DSO can put any business — regardless of size or sector — on the path to success.