Redefining DSO as Driving Success Optimally
CFOs are experts at managing company expenses. However, most would concede that managing cash flow is not always easy. As the saying goes ‘cash (flow) is king’, so it’s not surprising that mismanagement can have serious negative impact on a business. The key to staying on top of it is to hone in on an often overlooked component of the balance sheet Accounts Receivables. Creating a strategy for keeping A/R low can keep this very important metric in check-the speed at which receivables turn into cash. Otherwise known as Days Sales Outstanding (DSO).
Decoding your DSO
To help your organization achieve greater financial freedom, focus on increasing your cash on hand as much as possible by reducing the lag time between sale closing and payment received. Sounds relatively simple but the complexities of the sales process, individual customer contracts and financial terms can derail your best efforts to get your customers to pay within standard 15 or 30-day terms. The longer you wait for payment the higher your DSO becomes, negatively impacting cash flow.
But rather than fight it, find ways to reduce your DSO. You can extend payment terms but there are better ways to improve your cash-flow position.
Partnering for Performance
If your business sells technology or other equipment, consider partnering with a reputable and trusted financing firm to offer programs with flexible payment options. The benefits of partnering with a financing organization will far outweigh the associated cost. Financing programs pay equipment sellers much more quickly and efficiently than credit-paying customers; typically, within 24 -48 hours of system delivery and installation. This instantly reduces DSO, and by association, eliminates common cash flow and available credit issues because the financing partner pays for the sale upfront.
The benefits of offering customers financing options extend beyond reducing DSO. One key area is in shifting risk. By offering a financing program that is not managed in-house, the risk is now shifted to the financing partner. This increases the opportunity for the organization to stay financially healthy and ensure that sales professionals get paid faster.
Additionally, many technology manufacturers, resellers and managed service providers have discovered that they can also sell more products to more customers, more profitably, in a shorter time frame by engaging a financing partner. Also, leveraging a financing partner allows the sales team to earn more upsell opportunities and repeat business, creating long term, loyal customers that generate higher margin for the business.
A financing program will almost always out perform an in-house credit model where the business extends payment terms to its customers. This is easily illustrated if we assume that as an average, a technology vendor’s DSO is approximately 50 days, and an outsourced financing program can reduce that to just a few days. Imagine the opportunities that would open up for your business if you were paid in less than a week. For many, equipment financing is the best solution for your business and your customer.
Rethinking your approach to DSO
The faster your company can turn receivables into cash, the faster you can grow. Don’t get stuck in the traditional approach that puts a strain on your customers and your balance sheet. Find a finance partner that understands your market and offers flexible programs that address the needs of your customers and will positively impact your cash position. You may find that DSO is no longer a dreaded metric, but rather something to describe how you are ‘driving success optimally.’
To find out how you can improve cash flow, accelerate your business, and increase customer satisfaction with a trusted financing partner, contact IFS today.