You’ve made a sale! That’s great but the customer hasn’t paid and the invoice is now 90 days past due. This scenario is common amongst many businesses. Many businesses resort to offering extended payment terms but this is a bad idea because it affects their cashflow. What you really want is client satisfaction because when the client is happy they will quickly remit payment for the service or product that was provided to them coupled with strong A/R controls and processes that ensure you get paid in a timely manner.
By developing and comparing critical A/R KPI metrics (cost per invoice, process cycle time, payment turn-around, et cetera) to industry and competitor data you are able to realize opportunities for improvement in DSO. Finance executives can use this knowledge to reduce DSO with the company’s capabilities and ability to sustain DSO process controls in mind.
A client’s ability to pay on time is based on their credit risk. Finance Executives should stay abreast of client industry and market shifts, require and create a client financial stability plan when pursuing clients to ensure they are financially stable and are not slow payers. Some companies may be apprehensive about requesting a credit history in fear of losing an attractive customer, however, incentives and credit risk insurance can be offered to offset this possibility.
Payment terms should be made clear to clients by various communications, such as, the invoice itself, on-boarding materials, introductory emails, et cetera. These payment terms should also be in agreement with common industry practice and customer needs and expectations. For example, if clients are billed per retainers/retention, it is best that you require an initial upfront payment. Other ways to safeguard cashflow and ensure faster payment would be to offer broad payment options (ACH, Check, wire transfers, PayPal, Credit Cards, et cetera), payment plans and quick pay discounts.
Overdue receivables should require constant and daily communication with clients to understand the reason for the payment delay, offer payment solutions or optimize value.
The billing process is critical to the reduction of DSO because it should run smoothly. Meaning invoices should be created and sent on time, have no errors, and contain all the appropriate information. Incorrect charges, incorrect rate discounts and mailing addresses are all things that can delay payment. It is also important to update customer profiles in accounting software with contract agreements and up-to-date contact information.
Companies should regularly convey and update their A/R controls and processes. They should utilize the voice of the customer to gather data that can help improve those processes, support clients falling on hard times by offering payment plans, and develop client-centric processes for handling non-paying customers, including guidelines for managing disputes and turning over invoices to a collections agency.
Top management must commit to these DSO reduction efforts and have continuous conversations about A/R controls. They should make these controls visual so that everybody can see them and audit the process periodically. By continuously staying abreast of DSO metrics and making improvements as the industry and company changes will ensure that employees understand how important these efforts are to the company.