If you blindfold yourself and throw a stick, you can likely hit several dozen articles, blogs and white papers on the topic of DSO reduction. The fact that there are so many different voices chiming in about this topic is not necessarily a bad thing. In fact, we have a helpful document about DSO reduction right here (yes, that’s a shameless content plug).
While most would agree that knowing the steps to reducing DSO is important, understanding the barriers that keep you from actually doing it is just as important. I’ve identified four barriers companies typically face while trying to implement a DSO reduction program as well as suggestions on how to overcome them.
1 – Not knowing a realistic target DSO
A 30-day DSO might be great for one company but may be completely unrealistic for another. You, your peers and your competitors likely know what a good DSO is for your industry. Furthermore, it’s important to understand whether your company has the expertise internally to reach your target DSO. Once an assessment is done that factors in your internal expertise, takes into account industry norms and identifies the specific steps in the process, you can begin to get a better sense of what a realistic DSO target is.
You can further benchmark your company’s DSO target by checking out YCharts (https://ycharts.com). For a fee, YCharts helps customers gather company and industry data for investment decisions, but they also include average DSO data for virtually every industry. Once you determine what a realistic and attainable DSO is, you must determine if your organization is capable of reaching it.
2 – Not knowing who is responsible for DSO
This one is really worth investigating, because DSO is usually influenced by a number of stakeholders within your organization. DSO should be an important metric for several departments such as Sales, Account Management, Billing and Credit Management. Senior executives also have a role to play, especially if there are performance incentives tied to DSO or critical decisions that need to be made when extending credit to an existing customer or prospect.
If it’s not clear who should be responsible for DSO, your company should create a comprehensive credit policy that outlines who is responsible for what in your organization in relation to DSO reduction and management.
3 – Not knowing which tools will help reduce DSO
There are a variety of solutions available that can help you reduce DSO. Choosing the best one for your organization will depend on a number of factors, such as your industry, the types of customers you do business with, how many invoices you submit to your customers monthly or annually, and whether there is a budget and available resources to incorporate your tool of choice. You will also want to know how much reporting will be necessary when tracking DSO as well as who should be kept in the loop.
When considering tools, there are a number of options available, from invoice submission (third-party electronic invoicing, small business billing software, enterprise-level billing software) to payment receipt (ACH, early payment discounts, lockbox) that could get you closer to a lowering your DSO. Identify the pros and cons of each one, what measurable benefit they will provide and what is required to implement them.
4 – Leaving DSO responsibility to your customers
Reducing and managing DSO is your organization’s responsibility, not your customer’s. Although your customer is required to pay you – hopefully in a timely manner in relation to your agreed upon terms – that payment may sometimes be delayed. To help mitigate late payment, creating a clear and comprehensive written credit policy that every customer understands will go a long way in avoiding situations where a customer may pay late simply because the credit and payment terms were not as clear as they could be.
Reducing DSO is a very worthwhile endeavor that every organization should undertake. Understanding the barriers that keep you from reducing DSO is just as important as identifying the basic steps when initiating a DSO reduction initiative.
Ernie Martin is Founder and Managing Director of Receivable Savvy. He brings over 25 years of experience in financial supply chain management, marketing and communications and draws upon his extensive experience to share knowledge and best practices with AR professionals. His resume also boasts time at several well-known brands and companies such as Tungsten Network, Delta Airlines, CIGNA Healthcare and Georgia Pacific as well as a number of years as an independent consultant.