What is DSO and How To Optimise It?
The cash flow of any organization is crucial to its development and ability to scale. It’s essential that companies can organize cash flow and finances properly to make sure that everything keeps running smoothly. Numerous indicators can be adapted to study the condition of an organization’s cash flow. Among them is the Daily Sales Outstanding (also known as DSO).
In simple terms, the DSO is an important indicator used to measure a company’s financial health. It represents the duration a company needs to spend to convert receivables into cash. People often fail to understand the importance of receivables in running a business. They only show items or obligations owed to your company. Receivables are a popular way for a company to earn money for itself. When a company can get money quickly, it can maintain a healthy cash flow, and the financial position will be favorable. This means that improving this factor is a crucial aspect of optimizing an organization’s resources.
When the company can maintain a better cash flow through the state of its DSO, it will become easier for them to grow, have bigger investments and scale up its activities. It also helps the management secure its operations and moves to a large extent. Now that you know the importance of DSO. Let’s quickly find out the effective strategies that can be used to improve the conditions of your DSO. These strategies will help you enhance the conversion of a receivable into cash.
Carry Out A Detailed Analysis On The DSO
The first step to improving the DSO of your organization is to gather as much up-to-date data as you can about it. This data would then be used as a benchmark or basis to compare the DSO of the company to others around it. You see, Industry surveys and private benchmarking studies are a great way to perform an accurate analysis yourself.
As soon as the company’s assessment result is ready, they will better understand what is going on in the world around them. Suddenly, they will have better oversight to manage the company’s activities and implement better strategies to improve their DSO and get it up to par with the big brands. Take note that the means adopted to reduce DSO should be sustainable and suitable for your business. Don’t end up doing what will drive more customers away.
Redesigning Payment Terms
Every industry has its practices related to customer terms and how it relates to consumer expectations. As a result, it would make sense to update how the company has chosen to design its company-friendly terms and reduce DSO drastically.
These are some of the methods that can be used to incentivize payment methods for better DSO;
- Milestones: An agreement based on certain milestones make it easier for the business to receive pre-planned periodic payments instead of something done haphazardly.
- Discounts: It’s also another great idea to offer discounts on early payments made by customers. This method adds incentive to the cost and encourages them to pay up early.
- Deposit: You may also request a deposit from your customers before you get started with supplying your products and services. When using this method, you will have to pay extra attention to your customers and their overall attitude to payment.
Use Technology And Analytics
New technology will help to improve customer expectations and improve risk management techniques. By working on previous models and using pre-existing company data and information from banks, it’s possible to design new systems to determine when people will most likely pay off their debt.