The importance of gaining insight into why customers are not paying according to their payment term, should not be understated says Hugo Staman as he unveils the top five challenges in DSO management
More and more companies are experiencing issues in managing their days sales outstanding (DSO). But when it comes to tackling those concerns, it can be challenging to know where to begin. Recent complications, like Covid and the increase of inflation rates (link here) mean that proper management of your DSO is more crucial than ever. So, what can be done to keep the DSO under control – or even reduce it?
You must first start by examining the reasons why a customer may not pay their invoice on time, before then exploring how these reasons present themselves as challenges when it comes to DSO management. In almost all cases the challenges can be categorised in five key ways.
The first challenge is not only the most obvious but also one that can often create friction between a business’s sales and financial departments. This is because while a longer payment term means that can credit your customers for a longer period (an attractive sales proposition), it does cost your business money. And while those outstanding invoices remain unpaid, that is money that cannot be reinvested. Yet customers are now requesting even longer payment terms before signing new contracts.
So the question should be asked; is giving customers a longer payment term giving you higher margins or greater sales volume, in comparison to the resulting DSO? Finding the balance between these factors is crucial, as is a clear conversation between departments when bringing on new clients.
This comes down to getting in contact with your client as quickly as possible after the invoice due date and identifying the reasons for non-payment. This can be achieved by making collection calls and sending reminders in the most efficient and automated fashion, with specifically designed processes for the customer groups within your company.
Customers are becoming more and more aware of how far in a process they can proceed without payment. But to address this, insight is required into which customers are consistently paying outside the given payment terms.
Swift contact will also enable you to identify any disputes within the outstanding invoices. This means that a customer does then not have the option of waiting till the last minute before raising said dispute, affording them an excuse not to pay.
This brings us to the third challenge – when outstanding invoices are disputed. The most common excuse you will hear is that an invoice has not been received. However, there are a multitude of reasons a customer may give as to why an invoice is incorrect and can’t be paid.
This is why it is so important to both source and track feedback from your customers. With those insights you are then able to investigate and initiate improvement projects, ensuring your invoicing process can run as smoothly and flawlessly as possible, mitigating any payment delay.
The fourth challenge that companies often run into is the payment booking system for outstanding invoices. This is because, evidently, if payments have not been booked correctly, there will be a resulting impact on the DSO. So having an automated and efficient process to book the payment is fundamental in reporting the right figures.
If not, it will almost certainly show up as a dispute reason from the clients; the idea that something has already been paid or that it is not booked according to their instructions. The need to resolve these issues will only cause further delays.
The last challenge is gaining some level of insight into the standard fluctuations in your DSO and the reasons behind it. Most companies will have some sort of seasonality to their business which will reflect in their sales numbers and in doing so, impact their DSO.
The same goes for companies who will try and boost their quarter, half year or year -end figures by not paying their invoices. As such, it is important to always compare these figures against previous years – as opposed to month by month.
Within each of these challenges, you will notice the importance of gaining insight into why customers are not paying according to their payment term. That is the reason an efficient and automated collection receivables service can support you in your goal of reducing your DSO. By introducing a collection system that connects seamlessly with your enterprise resource planning (ERP) system, you will then be able to set-up multiple collection processes that focus efforts based on your needs.
For example, sending reminders and making earlier calls to those customers who are identified as frequently paying late. And within those processes, utilising customised reminders that adopt your specific communication style.
Collection receivable services can make this happen, making use of highly-trained collection professionals, whose sole focus is contacting customers – quickly, professionally and cordially – getting overdue invoices paid or finding the core reason for non-payment, processing that information, and communicating with the different departments to find resolution. And all of this, in each of your customers’ different languages and time zones.
It is this combination of the right people and the right system that makes all the difference. Helping you track these outcomes, better understand your DSO and more importantly, give you the tools to focus your collection efforts where they are most needed.
