Cash is critical to the survival to all businesses and increasing the speed with which cash flows in, improves your business’ overall health. Increasing the speed with which your customers pay you is one way to increase cash flow. The best measure for this is DSO (Days Sales Outstanding) which measures the number of days it takes your company to get paid for the work it does. It is calculated by taking the average Accounts Receivable (and Work in Process if your company has this), divide it by your Annual Gross Revenue (Sales) and multiply by 365 days. The resulting DSO will be different from industry to industry, but the lower the number the better.
There are many ways to increase your company’s DSO and I have listed many of them below. The best thing you can do is to talk to the employees involved in every step of the process from bidding to collecting. Find out what slows down payments and then find ways to avoid problems and speed up the process. It includes getting employees involved, measuring and reporting on the results, and rewarding employees when goals are met. Through an incentive program I developed, and support from senior leadership, a region of a large multi-national company was able to lower their DSO from 115 days to 81 days in six months, increasing cash flow by 20%.
The following are some of the steps taken to lower DSO and I suggest you do the same for your business:
- Ensure that you have a clear understanding of your customer’s expectation.
- If it is a service you are providing, clearly define the scope of work and define what is not in the scope of work.
- Review the contract for payment terms and ensure they are reasonable. When it is a long term project, be careful of milestones that force you not to get paid for long periods of time.
- Where possible, get a deposit or retainer up front to protect you and improve cash flow.
- Find out who the invoice should be sent to the attention of and clearly type this on the envelope and the invoice.
- Ask the customer what information they need with the invoice to process it quickly.
- Ask the customer when they process payments each month and when they need to receive invoices by, in order for your invoice to be paid on the earliest cheque run.
- Make sure that all involved in the sale or the project know what is expected. They need to communicate to the appropriate person when the customer asks for changes in the scope of work or ask for additional work that is not in the agreement.
- Come to an agreement with the customer on what the revised or additional work is, define it clearly and agree on what the revised price will be before going forward with the work.
- If invoicing the customer before an agreement is reached on the additional work, invoice the original work separately so that the lack of agreement for the additional work doesn’t slow the payment on the rest.
- Confirm with the client that they received the invoice shortly after you sent it and that there are no issues with it. I recommend that this be done within two weeks of sending the invoice.
- Maintain notes on every invoice that can be accessed and updated by everyone that is involved in or has an interest in the collection of the invoice. Ensure the note has a “call to action” (who is going to do what by when?) and the name of the people involved in the conversation.
- Periodically check with the customer on the status of the payment until it has been paid.
- Depending on the type of business, you may have credit limits set for each customer which should be adhered to.
- Watch the payment patterns of your customers and if payments become slower than usual, question the customer on the reason why. There may be a good reason, or they may be having financial difficulties.
Now that you know how to lower your DSO and thus increase your business’ cash flow, put it into action. Stomp down your DSO!