Bad, bad debts! DSO is a good indicator of the efficiency of sales receivables management
Kimmo Kauranen, Vice President, O2C Business, OpusCapita, urges companies to beat lazy money out of its hiding places and into action.
The financial markets have changed for good. These days all financial processes need to be efficient. DSO (Days Sales Outstanding) provides a good indicator of the efficiency of sales receivables management.
Most companies have experienced financial difficulties in one way or another. Despite this, they monitor their bad debts passively and have an overly tolerant approach to late payments.This can have a huge effect on a company’s finances. The fact is that when a receivable has been outstanding for more than 90 days, the likelihood of receiving the payment starts to reduce significantly.
Ensuring that receivables are paid is often regarded as something that is just the financial department’s responsibility. However, the sales department also has a significant role which must not be forgotten. Long payment terms offer an easy way to increase sales, but if there is no end-to-end thinking involved in the pricing, the good sales figures can prove to have a bad impact on the company’s finances as a whole. According to The Hackett Group, bad debts can total up to 1% of net sales even in a good company. Put simply, you could say that by selecting poor customers or contracts, sales personnel are responsible for a cost that is more than half of the total cost of the company’s finance function.
Here are 10 ways to optimize sales receivables management from the perspective of customer satisfaction and money turnover:
- Optimize the service process: eliminate unnecessary phases, standardize procedures globally and locally.
- Consolidate invoicing by products and deliveries to ensure the success of reconciliation.
- Eliminate manual invoices – they are very expensive.
- Minimize and centralize internal invoicing. This will help reduce the number of invoices and avoid currency risk.
- Ensure that all deliveries are actually invoiced.
- Closely monitor the process.
- Draw up clear KPI targets and monitor their achievement.
- Minimize the number of small invoices and various invoice formats.
- Where possible, use electronic ordering (EDI) and portals for processing orders and invoicing.
- Shorten the length of time between order registration and invoicing.
Vice President, O2C Business