Why is it important to reduce debtor days?
Debtor days, also known as DSO, is one of the key metrics for AR that has a substantial impact on the business's cashflow. Companies rely on money to run a continuous operation, pay salaries, upgrade systems, re-stock, and many other initiatives to drive sales growth. Reducing the DSO will provide liquidity and will show external stakeholders, such as auditors, investors, and banks, the business health and how cash flow and debt are being managed. Moreover, it will avoid business being forced to take debt at high costs and fees and make decisions under pressure with low bargaining power.
Reasons you might have high debtor day
Having a high DSO can be driven by different reasons. It is important to understand the processes and procedures implemented across the business. This means not only within the AR team but also what decisions management and sales teams are taking to sell more, as this can also be having an impact on the DSO.
- Inefficient collections processes: The main reason to have inefficient processes is running an AR operation based on manual collections. Manual processes are not scalable, as a person or team has only a limited time available to deal with all the accounts. If the customer base and/or transactions are increasing, the only way to respond is to add more hands to the team, which is not cost-effective and is not solving the problem.
In addition, while the team is prioritizing and focusing on the past due, there is no time left to avoid current invoices becoming overdue. This situation will keep rolling and reducing your outstanding amount will become more and more challenging.
- Team Management: Lack of accountability of team members will make it harder for management to make informed decisions. Understanding what the targets are and the performance of each team member against them is crucial to identify potential areas of improvement and drive efficiencies across the collection processes.
- Credit Terms: Adjustments to your credit policy will also impact the DSO. How you manage the credit terms for your customers will define whether your receivables increase or not. Three ways in which you might be increasing your receivables through credit terms are: 1) issuing credit to customers that have outstanding payments, 2) driving sales by offering longer payment terms, and 3) substituting cash payments with credit to boost sales.
Aligning the credit policy with business objectives and sales targets will contribute to keeping a low DSO.
How to reduce debtor days?
By reviewing the equation itself, we can identify two ways to reduce your debtor days - increasing credit sales or reducing receivables. While both have external factors not fully controlled by the business itself, establishing controls and procedures to manage credit and drive efficiencies across the collection processes to get paid faster is the ultimate goal. Here is a list of actions that can be taken to reduce DSO:
- Digitize your AR operation and automate the collections processes. Embrace technology and use it to drive efficiencies across your business.
- Make the payment experience convenient for the customer, offering different payment methods.
- Get to know your customers and do the necessary due diligence before giving any credit.
- Offer a customer portal where they can access all information they could need at any time. For instance, users should be able to access documents and statements, make payments, raise disputes, and make payment commitments.
- Provide accurate and timely information to all stakeholders. Real-time information is key for businesses to prioritize tasks and easily identify pain points, keeping everyone aligned and updated.
- Relationships are crucial, take your time and thank your customers when payments are made.
- To support the collections processes, use different communication channels to contact your customers where it is easier to find them. Emails, calls, meetings, SMS, WhatsApp, you name it - as long as you are reaching your customers with the right type of message and information in the right time, then you are doing your job.
The good news is that with YallaCollect you will be able to implement these guidelines and reduce your debtor days in no time! Schedule a demo now and see for yourself!