Days Sales Outstanding (DSO) is your company’s average collection period.
The smaller this number, the faster you are in collecting money from clients.
[For the mathematically inclined, a more accurate measure of your Collection Department’s performance is the Percentage of Overdue Amount (monies beyond due date) to Total Due Amount (Total uncollected amount including fresh sales) – also, known as Days Delinquent Sales Outstanding (DDSO). See Advantage of using DDSO to measure the effectiveness of the credit department (http://www.encyclopediaofcredit.com/WebHelp/articles/risk_analysis/art730.htm )].
Depending on the nature of your business (for example, number of transactions, customer profiles, and competition), you may choose from a variety of strategies and tactics to reduce your Accounts Receivables Average.
Tip #1: Re-evaluate your Credit Sales Policy
Why are you selling on Credit? Why not Sell ‘Cash’?
Sell ‘Cash’! On Zero Days Credit! Even better, see how you can collect advance before delivering a product or a service.
Yes, you heard it right!
Question your product/service/marketing strategy – why are you selling on credit, at all?
Take a fresh look at your product/service basket and market segments.
Perhaps, you can identify products/geographical regions where customer will willingly/happily pay cash. This could be because your product or service is tightly coupled with (and/or is essential to) the customer’s workflow and you can create an edge over competitors due to stock availability, location, price, etc.
Create a marketing/selling strategy on how you can channel adequate energies and resources on finding and selling in those areas (Location/Features/Price) where customers will easily pay cash.
Tip #2: Create/Modify/Implement a New Credit Policy which helps you plug cash flow leaks
If you do not have a Credit Policy, create it to achieve clarity and consistency in giving credit to your customers.
If you already have a Credit Policy, revamp it to take advantage of changing market conditions.
Once you have an up-to-date Credit Policy, implement it with rigor and discipline. Make someone accountable to track Credit Policy deviations.
Tip #3: Have a New Customer Policy, Customer Retention Policy & Customer Firing Policy
Don’t do business with any and everyone. Do background checks before committing transaction with a new customer. Identify and give higher priority to faster paying customers. Fire your low-value slow paying customers.
Tip #3: Streamline Your Collections Process
- Insist on having your collection follow-up process move with clock work precision.
- Based on Due Date of Outstanding, schedule the escalation process – Emails, SMS, Calls, Visits and Legal Recourse.
- Ensure that the monitoring team regular sends New Customer Verification Reports, Credit Policy Deviation Alerts, and alerts on payment variations and disputes.
Tip #4: Update Your Customer Contact Details
Over a period of time, customers change their contact persons, phone numbers (including landline), email-ids and even physical locations. Having an updated customer contact database facilitates the collections process and this could be critical in following up on delayed payments and/or taking legal recourse.
Tip #5: Train Your Team to Follow up with rigor and discipline
A well trained tele-calling follow-up team knows when to use appropriate tricks of the trade – like calling on odd-hours, when to insist on cheque number, follow-up based on customer’s cash flow cycle, and so on.
Watch this space for more on each (and many more) of the above.