It's obvious, if your company doesn't receive money from your clients it will fail. Money and cash flow are what keep a company afloat. Part of that survival is solid accounts receivable management. You'd be surprised if you knew the number of small businesses that die every year because of poor cash flow management, especially startups. The hardest part about managing cash flow for both small and large companies is debt collecting. It's not only difficult to collect the debt that is owed to you but also collect it quickly. Your business should try to focus on reducing the amount of Days Sales Outstanding (DSO).
According to Investopedia, DSO is defined as "a measure of the average number of days that a company takes to collect revenue after a sale has been made." To calculate DSO, you divide your accounts receivable over your total credit sales and multiply that number by the number of days outstanding (which you probably already knew). A low DSO means that it takes your company fewer days to collect its accounts receivable. A higher DSO means that you are selling your product on credit and it takes longer to collect money.
It's simple, if you lower the time it takes to collect your money, the easier it is to get paid. But how do you reduce days sales outstanding?
Take a look into the industry that you and your organization work within. This way you can check to see the industry standard for extending credit. By knowing this, you can better understand your own term offerings.
2. Invoices or Statements
Realize that your customers or clients are human and they need adequate time to pay and send back their invoices to you. If they don't receive their invoices or statements on time then it is likely that they won't be able to pay you. It may be beneficial to your organization to look into online payment options.
Staying in communication with your customers is important, especially if your DSO is high. There is no harm in giving them a friendly reminder and they will likely pay you sooner rather than later if you do that simple solution.
4. New Technology
Have you looked into easier ways to collect and manage your accounts receivable? There is a growing trend toward cloud-based accounting methods that make it easier for anyone to manage their accounting. Whether you are a well-established corporation or a startup, this new technology can be extremely beneficial to you.
Credit can be a wonderful thing for your business but it can also be harmful. Take a look into your credit approval process to determine a few things. Do you have a credit application? Are you reviewing their business credit before purchase? These two simple changes can have a huge impact on decreasing your DSO.
Keeping credit card information on file is the easiest way to ensure that you get paid on time and it gives you the ability charge their credit cards a week earlier. However, if you decide to take this route you will need to discuss with the customer before you start charging their cards a week earlier than usual.
If your Days Sales Outstanding is higher than your industry's average, you need to do something about it. High DSO leads to less of a chance to get paid on time which not only hurts your organizations accounts receivable but also your overall revenue.
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