Getting Paid

This tip was a suggested to me to share. Days Sales Outstanding (DSO) is a calculation used to determine how long it takes, on average, to collect receivables. A low DSO shows that a company collects receivables quickly. A higher DSO means that receivables are outstanding longer. Companies using this typically look at this monthly. To calculate DSO, divide the total outstanding receivables at the end of the period by the total credit sales, then multiply that times the number of days in the period analyzed (typically 90 or 365 days).

Right off, a low DSO seems preferable to high DSO, and that’s generally right. But if DSO goes too low, it could be that credit policies might be too tough and could be limiting sales. Most of the time, though, it’s the higher DSO that cause concerns. As the DSO gets higher, cash flow problems can result. This could result from customers being unhappy with a company’s product or service, selling to customers who are not ideal credit customers, or that the company’s collection/credit department is overloaded or not well-organized.

Looking at DSO as it changes over time can often point out trends. Sometimes, a “gentle reminder” needs to be communicated to your customers about their outstanding invoices (or sometimes a not so gentle reminder). One way to send the message is to make sure that your billing process tells your customers that you expect prompt payment. Your company’s shipping system can be one important tool to help keep DSO in check. First, use the shipping notification feature when the order is shipped. In our CPS shipping software, the SHIP eLERT® email lets customers know their package is on the way. When your billing department knows that every customer is notified that their order is shipped, they have information that lets them be more effective in the collection process when they contact customers about accounts receivable. That’s the first “helping hand” from the shipping system.

Next, your shipping system can also let you know that delivery has been made. Instead of tracking one package at a time, CPS can track every shipment in a given date range and let you know, at a glance, the delivery date. One ploy by slow payers is to say “We didn’t receive the order.” There can always be delays in payments due to many reasons, and you may want to continue to do business with at least some slow paying customers. Use the tracking information from your shipping system to help your collection process become more successful and keep DSO in the right range. For more information about CPS, visit www.HarveySoft.com.