Controllers Council recently held a panel discussion on 6 Strategies to Reduce DSO & Improve End-to-End AR Performance, sponsored by Esker.
Esker is a global cloud platform built to unlock strategic value for finance, procurement, and customer service professionals and strengthen collaboration between companies by automating the cash conversion cycle. Founded in 1985, Esker operates in North America, Latin America, Europe, and Asia Pacific with global headquarters in New Orleans, and US headquarters in Madison, Wisconsin. Our expert panelist is Jim Ackerman, invoice to cash business development manager at Esker.
Following are key takeaways to this discussion. If you are interested in learning more, view the full webinar archive video here.
The goal is to reduce DSO, to have the lowest DSO possible, and quickly recover payment on accounts receivable. A high DSO value means it takes a company a lot longer to collect and could lead to cash flow problems due to longer time between the sale and the time the payment is received.
Strategy 1: Stricter Credit Management
Are you performing credit evaluations on all your new customers? Are your credit terms appropriate and followed by your sales department? Does your customer service department flag new orders that do not have a completed credit app? Do you have a procedure in place for updating credit information on a regular basis?
Some credit management tips include:
Onboarding New Customers
The first step in managing the credit risk begins the moment a new customer relationship is formed. Assessing credit worthiness is crucial. It’s about understanding who you’re doing business with and setting the right credit terms from the start. But how effective is your current policy? Are you ensuring that these policies are adhered to and audited? It’s not just about having a policy. It’s about actively implementing and reviewing it.
Second, let’s talk about creating scoring models. Many businesses use tools like Excel for this, relying on established criteria, or even tribal knowledge. These models can help you decide how much credit to extend based on a customer’s historical data and behavior.
Ongoing Assessments
The financial health of your customers can change. Regular reviews of their credit status are vital. Some companies set up specific timeframes of their reviews. It could be quarterly, semi -annually, or annually, depending upon your business model and even your risk tolerance.
Also, establishing a clear criteria for triggering these reviews. For instance, if a customer’s average payment period starts to deviate from the norm, it might indicate a potential risk increase. Monitoring these changes proactively allows you to mitigate risk before they affect your DSO.
Strategy 2: Invoicing Best Practices
There are some things you can do to help with DSO, even through invoicing. Some invoicing tips include:
- Terms and Onboarding: This includes deciding how invoices will be presented and accepted. You can also ask yourself, does your customer prefer invoices via EDI, email, or maybe through a dedicated portal? Also ensure you know who at your client’s side is responsible for processing these invoices. Having an accounts payable contract up front can avoid unnecessary delays.
- Migrate to electronic as much as possible
- Stop managing your invoice
- Stop manually inputting invoices into portals
Strategy 3: Making It Easier for Customers to Pay You
If we’re focusing on optimizing payment processing, efficient payment methods not only speed up the transaction process, but also ensure that your funds are available quicker. And this obviously directly impact your cash flow. So, as you transition your customers into electronic payments, this is a process most organizations are missing. And what I mean by missing is it’s one thing to have a way for your customers to pay you electronically, and then it’s another thing to have a strategy that gets your customers in a self -service environment where they can pay you to give them the means to pay you electronically. And that takes some strategy that ESKER helps with as far as best practices, templates to your customers to help them understand that there is an option to pay you electronically.
The other thing is accelerating payment terms. If you currently allow payments at net 30 days, consider tightening this to net 10 days. It’s about being more aggressive in your payment terms to accelerate cash inflow. This change should be communicated clearly and effectively to ensure your customers understand the new expectations. But it also is an option that you can offer within a self-service portal to say, hey, you can give early pay discounts. There’s a lot of controls that you must get your customers to pay you electronically, one of those being accepting cards and then also managing the cost.
Strategy 4: Accelerate Your Cash Application Process
How do we speed up cash application? How do we look at remittances and bring those in so that we can help apply cash? Some cash application tips include:
- It’s vital to ensure there is no spillover to the following day. So, we want to ensure same -day application of cash receipts. This requires diligence and a proactive approach in your accounts receivable process. By ensuring all payments received are applied on the same day, you avoid delays and keep your cash flow running smoothly.
- Require detailed remittance advice. Require all your customers, if you can, to provide remittance advice with their payments. It’s essential to know exactly what each payment is for and to apply correctly without delay. This practice helps prevent errors and confusion and facilitating a faster reconciliation process.
Strategy 5: Tighter Claims & Deductions
This is an area that directly affects your revenue and cash flow. Implementing best practices in this area can prevent revenue leakage and maintain healthy customer relationships. Some claims and deductions tips include:
- Require stringent policy adherence
- Build strong terms and conditions – if a customer decides to short pay you, you have T&Cs on what’s allowed and what’s not allowed
Strategy 6: Proactive Collections
Effective collections are pivotal in maintaining a healthy cash flow, and here are some proven tips that are helping with collection strategy:
- Send dunning or payment reminders before invoices are due
- Send statements on a routine basis and make sure you’re sending them the right details that they need to remit payments
- Follow-up on promise-to-pays (calling them the day before)
- Accept payments for credit card/delinquent payments
To learn more about these strategies, download full webinar here.
ABOUT THE SPONSOR:
Esker is a global cloud platform built to unlock strategic value for finance, procurement, and customer service professionals and strengthen collaboration between companies by automating the cash conversion cycle. Founded in 1985, Esker operates in North America, Latin America, Europe, and Asia Pacific with global headquarters in New Orleans, and US headquarters in Madison, Wisconsin. Visit https://www.esker.com/ to learn more.
