DSO is the average number of days a company takes to collect revenue for sales made on credit. It indicates how quickly customers pay and how much cash the company converts from credit sales.
When sales either go uncollected or take too long to get collected, it hurts the company’s cash flow and debilitates day-to-day operations. The shorter the DSO, the better. It means a shorter amount of time for the company to collect money.
So how do you shorten DSO and strengthen your collection efforts?
Here are a few tips.
1.Automate business processes
Based on a revenue cycle report by PayStream, automating the collection process helps companies reduce DSO by 10% to 20%, past due receivables by 25%, and bad debt reserves by 15% to 25%.
Data released by Forrester Research shows that about 75% of B2B buyers prefer to purchase work-related products online, but a meager 25% of B2B companies sell online. This only highlights the need for B2B sellers to step up their game in a world where the internet dominates many aspects of modern living.
Web-based credit collections management systems are your best bet for streamlining ecommerce processes. They are easy to implement and can handle end-to-end services, from credit approval to collections.
Systems like Apruve even allow customers to check out now from an online store and pay later. It consolidates multiple orders, invoices them per month, and takes care of credit collections.
2.Provide timely and accurate information
Incorrect charges or late invoices can result in lengthy, headache-inducing disputes. Late invoices mean late payments, and disputes entail additional administrative costs on your part, particularly where communications management and relevant paperwork are concerned.
To minimize the chances of human error creeping into your invoicing procedures, consider integrating a web-based document management system into your processes to automatically send invoices to customers and other related documents via email.
3.Tighten credit requirements for new applicants
Credit has become a necessary arrangement for small and large businesses alike. While it offers a number of advantages, i.e. creating a strong base of regular customers, it also involves risks, such as incurring losses due to nonpayment.
Before extending credit to a new customer, consider the resources at your disposal. Would you have enough money to shoulder operating expenses while carrying receivables? Entrepreneur.com suggests that no matter how credit-worthy a customer is, “never extend credit beyond your profit margins.”
At the end of the day, a stricter credit policy decreases your risk of default payments. But too strict a policy may not prove competitive in the long term. Assess your tolerance for risk. Should you decide to be more liberal with your credit policies, gauge your willingness to do the legwork tied with credit management.
4.Offer more payment options
Not everyone has access to credit or debit cards, and some customers are not comfortable punching in their card numbers online due to security or fraud concerns.
By offering more payment options, you’re making your customers’ lives easier, which can translate to faster payments processing. Mobile or digital wallets like PayPal, Google Wallet, and Apple Pay are just some of the alternative payment modes you can offer on your ecommerce site.
5.Ask for downpayment or deposits
Advance partial payments minimize the risk of defaults. Requesting for them in advance also lets you assess the customer’s willingness and ability to pay.
Downpayment and deposit requests should be disclosed in your company’s terms and conditions. Generally, an amount equivalent to 20% to 50% of the commercial transaction forms part of the initial deposit. But because an advance payment is a risk on the buyer’s side, consider securing a bank guaranteeto dispel concerns regarding your company’s possible nonfulfillment of contractual obligations.
Selling on credit is one of the many ways companies attract both new and existing customers to purchase from them. It has become a way of life in today’s economy where competition is fierce. Despite this, never allow credit buyers to drag out payments. Take action and implement the necessary steps to solve the problem as soon as possible.