Finance leaders across the globe have been facing an uphill battle when it comes to cash flow, with the average time it takes to get invoices paid rising to nearly three months last year, according to a survey released last week from Allianz Trade, a unit of the Munich, Germany-based Allianz Group insurance giant.
Days sales outstanding or DSO, the average number of days it takes a company to get paid for a sale and a measure of cash flow health that is closely watched by CFOs and accounts receivable professionals, increased 3 days for the full calendar year of 2023 to 59, according to the Allianz survey of about 45,000 publicly listed companies from more than 35 countries.
“From a CFO perspective, monitoring and keeping DSO in check is key to preventing cash flow difficulties,” Ano Kuhanathan, head of corporate research for Allianz Trade, said in an email Monday, noting that DSO and Days Payables Outstanding are two components of a company’s cash conversion cycle. “A high DSO figure indicates that a company takes considerable time to cash-in payment, which could stem from voluntary credit extensions (i.e. a commercial strategy) but also from late payments from clients facing financial issues.”
In terms of the variation of DSO across sectors, retail enjoyed the second-lowest DSO at 25 due to it typically having more cash-paying customers, while construction was above average, posting one of the largest with an average DSO of 74.
Many parts of the company need to cooperate to reduce DSO, but an Allianz blog post lists six steps that leaders can take to reduce DSO in accounts receivable:
Begin with the numbers: Companies can begin by gathering data on its DSO status to compare to peers and competitors and use it to set and drive reasonable goals. “For example companies may be able to reduce DSO by, say 20 days by significantly tightening customer credit approvals, but that will not be worth much if customer acquisition and retention suffers,” Allianz said.
Target an acceptable customer credit risk profile: Once you do, it’ll be important to get the sales department on board and it is worth considering ways to hedge the bet. “Companies may need to implement specific incentives and penalties to make sure salespeople and sales managers adhere to the company’s customer credit requirements,” according to Allianz. “In some cases, companies can strategically deploy tools like credit insurance to help mitigate these risks without losing an otherwise attractive customer.”
Clearly define your payment terms: Avoid confusion by clearly stating on an invoice when a payment is expected and set up a clear approval process to decide the circumstances where upfront payments or incentives to pay faster would be offered.
An invoice process audit: The wrong mailing addresses, invoices that don’t include agreed-upon discounts and incorrect charges in general slow things down.
Stick with the accounts receivable process: It’s not over when the invoices are sent. Companies need a plan for following up, reminding customers about unpaid invoices and addressing problems such as by arranging a special payment plan.
Monitor the shift to keep the momentum: Deciding to reduce DSO often means changing habits including administrative processes and procedures. Companies “need to make sure “people do not return to the old ways of doing things,” the Allianz blog states.
