Editor’s note: Przemek Gotfryd is co-founder and COO of Capchase, a New York City-based firm that provides flexible payment options and revenue-based financing to software-as-a-service companies. Views are the author’s own.
In an era with more technology tools at our disposal than ever before, it’s ironic that something as simple as collections — especially when it comes to software-as-a-service companies’ accounts receivable departments — isn’t going that smoothly.
CFOs and other leaders with a hand in money management should recognize the importance of closely monitoring days sales outstanding, as it directly impacts working capital management and overall financial health.
Indeed, days sales outstanding is a critical metric reflecting the average number of days a company takes to collect customer payments. An increase in DSO can indicate potential cash flow problems and inefficiencies in accounts receivable management, leading to decreased liquidity and increased financial risk.
Yet, the median DSO has increased from 31 to nearly 40 days across all company sizes since 2021, according to a recent Capchase report. Software-as-a-service companies with average annual return of between $1 million and $9.9 million face the longest DSO and subsequently a greater risk of revenue leakage as unpaid invoices get lost, forgotten, or given up on.
SaaS companies in this ARR range or smaller are affected more seriously by unpaid invoices than their larger counterparts, because they tend to rely on timely payments to cover operations and development costs. Larger companies often have more of a cushion that makes unpaid invoices less of an urgent issue.
One of the challenges is that many companies — especially SaaS companies with an annual recurring revenue under $10 million — are engaged in a complex balancing act between closing larger deals and financing operations and development. At the same time, for these smaller companies, a couple of overdue invoices from large customers is all it takes to reach the tipping point into the red.
In an attempt to keep customers more disciplined, many companies are offering tighter payment terms. Yet DSO has increased by an average of seven days across industries and performance groups, meaning that despite stricter terms, collecting on time is simply more difficult in today’s economic environment.
Late payments have increased massively since 2021, and the ripple effect is felt across industries. For example, in 2021, invoices overdue by more than 50 days represented less than half of total overdue invoices. This bucket increased to over 78% by September 2023.
DSOs are rising because many of their customers — and generally many companies — are holding onto their cash longer. With higher interest rates as well as the uncertain macro environment, companies are doing so because they don’t know when capital, such as a venture capital round or debt raise, will be available next.
With sales and renewals cycles longer thanks to increased buying scrutiny and negotiations, customers are likely asking for longer net terms at contract signing, which puts the vendor in a pinch. Finance teams are also stretched thin, focused on fundraising or day-to-day operations, and looking for ways to offload some of the manual burden of invoice collections.
Moving forward, SaaS companies should invest in more robust collections infrastructure, whether it’s built in-house or by subscription to an established tool that can assist in effectively invoicing, sending reminders, and changing payments. The ideal tool leverages automation to improve the customer experience and free up finance teams to focus on more important tasks while also making cash flow more predictable.
Alongside automation, personalization is key. Many automated collections tools allow for customization so your customer can feel personally cared-for, known, and valued. Efficient collections come from a combination of seamless payment options, automation, and a personal touch. With stronger collections, SaaS companies of all sizes can expect to see DSO decrease and cash flow stabilize.
As we’ve all experienced over the last two years, the SaaS industry can be extremely responsive to macro market conditions, for better and for worse. Companies must focus on stability, predictability, and sustainable growth if they are to weather the ups and downs of the economy, and investing in improved DSO is a great place to start.
