The Ultimate Guide to Accounts Receivable Management
Updated: Nov 15
How to Reduce Your DSO and Improve Your Cash Flow
Accounts receivable management (AR) is the process of tracking and collecting payments from customers. It is an important part of any business, as it ensures that you are getting paid for the goods and services that you provide.
Effective AR management can help you to reduce your days sales outstanding (DSO), improve your cash flow, and avoid bad debts.
What is DSO?
Days sales outstanding (DSO) is a financial metric that measures the average number of days it takes a company to collect payments from its customers. It is calculated by dividing the average accounts receivable balance by the average daily sales.
A lower DSO means that a company is collecting payments from its customers more quickly. This can improve a company's cash flow and reduce its risk of bad debts.
How to Reduce Your DSO
There are a number of things you can do to reduce your DSO, including:
Send invoices promptly. As soon as you've provided goods or services to a customer, send them an invoice. This will help to establish a sense of urgency and let the customer know that you expect to be paid on time.
Offer early payment discounts. Early payment discounts can incentivize customers to pay their bills early. This can help to reduce your DSO and improve your cash flow.
Set clear payment terms and conditions. In your invoices and contracts, be clear about the payment terms and conditions. This includes the due date, the consequences of late payment, and the methods of payment that you accept.
Follow up with debtors regularly. If a customer's payment is overdue, follow up with them promptly. You can do this by sending a reminder email, making a phone call, or sending a letter.
Use technology to your advantage. There are a number of software solutions that can help you to automate your AR process. These solutions can help you to send invoices, track payments, and follow up with debtors.
How to Improve Your AR Process
Here are some tips for improving your AR process:
Have a clear and consistent AR policy. Your AR policy should outline the procedures that your team will follow to track and collect payments from customers.
Use a CRM system to track customer interactions. A CRM system can help you to track customer interactions, including sales calls, emails, and meetings. This information can be used to improve your AR process and identify potential problems early on.
Automate as much of your AR process as possible. This will free up your team to focus on more strategic tasks.
Train your team on effective AR techniques. Make sure that your team understands your AR policy and knows how to follow up with debtors effectively.
Monitor your AR performance regularly. Track your DSO and other key AR metrics on a regular basis. This will help you to identify areas where you can improve your AR process.
Accounts receivable management is an important part of any business. By following the tips above, you can improve your AR process and reduce your DSO. This will help you to improve your cash flow and avoid bad debts.