Looking to improve the cash conversion cycle? Cash traps are typically concentrated in two areas – inventory and accounts receivable. Here’s some guidance on spotting problems with your accounts receivable to improve collection and steps to ensure payments arrive on time and in full.
3 ways to measure your A/R efficiency: DSO, DDSO, DBT, and more key metrics
Before recommending Accounts Receivable (AR) collection techniques and ways to improve cash flow, let’s examine some of the basic A/R performance metrics.
1. Your DSO can impact your cash flow
DSO, or Days Sales Outstanding, is an accounting metric that measures how many days it takes for a business to collect money for a credit sale. Companies monitor DSO because it strongly affects cash flow. DSO is calculated by: Accounts Receivable/total credit sales x number of days
How does high DSO impact cash flow? A higher DSO could signal many things – that customers are struggling to make payments, customer service is declining or payment options aren’t customer-friendly. High DSO negatively impacts cash flow. The lower the DSO is, the quicker a company converts its credit sales into cash.
A commonly accepted benchmark for a good DSO varies by industry but generally falls between 30 to 45 days. Since DSO benchmarks can vary across industries, it's always advisable to research and refer to specific benchmarks relevant to your industry for more accurate comparisons. For example, a B2C SaaS company may have a DSO of under 30 days, while a B2B SaaS company may have a higher DSO exceeding 70 days. DSO can be calculated on a monthly, quarterly, or annual basis.
2. Use DDSO and DBT to optimize cash conversion cycles
On the other hand, DSO isn’t the only way to measure your Accounts Receivable department’s effectiveness, as DSO is often impacted by factors beyond your accounting team. Specifically, fluctuations in sales volume impact DSO—which accounting usually cannot control. Therefore, Delinquent Days sales Outstanding can be used in conjunction with DSO metrics for determining your AR efficiencies and health of the cash conversion cycle.
- DDSO calculates the average time between the invoice due date and the date paid.
- DBT is customer-specific, and calculates how long it takes a customer to pay their invoice after it is due according to the invoice terms. It is useful in determining credit-worthiness of a customer.
3. Measure Accounts Receivable Turnover Ratios to improve revenue collection
To measure how efficiently a company is collecting its revenue, companies measure ratios like accounts receivable turnover. This is calculated as net credit sales divided by average accounts receivable (the sum of accounts receivables over a given time period/2)
4 ways to improve your company's AR collection metrics
Encourage faster payments by offering early payment incentives
Probably the simplest way to get paid quicker is by offering payment incentives on invoices. Early payment discounts encourage customers to pay an invoice before its due date. These terms generally come in the format 1% 10 Net 30—which means the payer receives a 1% discount if you receive payment within 10 days of the invoicing date, otherwise payment in full is due 30 days after the invoice date.
Accept diverse payment methods for faster international transactions
The more payment methods (ACH transfer, wire transfer, credit card, traditional check, digital wallets, etc.) you are able to offer and accept, the better - especially if you are doing business with international customers. New payment methods are continually being adopted by payers, so accepting payments via more methods allows your business to be flexible and receive funds from customers faster.
Enhance payment efficiency through automated invoicing processes
Electronic invoicing eliminates the obvious delays and costs associated with postal mail, but the benefits of leveraging electronic invoicing are so much greater than that - such as the ability to automate notifications to past-due accounts.. transparent process for your payers.
Automating your invoicing process enables scheduled payment reminders to notify your customers about their unpaid invoices via email, text, phone calls, and other communication channels.
Improve cash flow with thorough credit evaluations:
Before extending credit sales to a new customer, it is a best practice to check their credit history to ensure that they have a record of paying bills on time. Additionally, establish clear terms and inform your clients of all the details before any agreements are made. If your DSO is worsening and you want to improve efficiency, consider implementing stricter credit evaluations.
International A/R in focus: Maximizing global collection efficiency
The average DSO for international receivables is 97 days, according to our recent survey of finance professionals.
While many of the metrics by which success is measured, as well as the tips for collection success, remain the same when expanding overseas – there are unique challenges presented by collecting global receivables. Here are four ways to ensure strong global receivables operations.
- Offer the right payment methods to meet international customers’ preferred payment methods
Flywire’s research shows that there’s a disconnect between what payment methods international customers want, and what businesses currently offer.
How business want to get paid by international customers (order of preference)
How international customers prefer to pay (order of preference)
- Credit card
- Debit card
- ACH or wire transfer
- Wire transfer
- Credit card
- Offer payment in local currency and receive payment in preferred currency
The lack of ability to deal with fluctuating exchange rates between the time of invoicing and the time of payment contributes to a major problem with international invoicing: short payments.
- Ensure compliance with local invoicing regulations
For each new international market you enter, there may be regional, country-specific, and localregulations and laws to consider for invoicing that you must comply with. There are even sometimes local regulations and laws guiding what exactly the invoice must look like and how it must be delivered.
- Bolster customer support with multilingual support and communication across time zones
One of the most challenging parts of international business can be the clock itself. Make sure your customer support organization can support customers during their business hours – and discuss concerns in their local language.