Ever heard the term “Days Sales Outstanding”? We’re about to tell you how it can help or throw you into a cash flow crunch.
It’s the time it takes for customers to pay your invoices and it’s critically important for two important reasons, gauging how well you manage your customers and it can reveal the quality of who you sell to.
Have you done enough today to look after your cash flow? It’s not about asking have I issued an invoice on time or has my customer paid today, these are all yes or no answers. You need to run a continues process of “have I done enough” or “did I make an effort to” improve collections, credit terms and issuing invoices on time and within terms each day?
The life-blood of any business is its cash flow. It’s the ability for you to deploy funds pay vendors, wages and grow the business. But how do you know if your business is going to have enough cash to make it?
— Waddle (@getwaddle) June 2, 2016
Bring on average days’ sales outstanding, when you create invoices for clients, you are diving into the DSO process flow.
It’s the average time it takes a customer/client to pay you, knowing and keeping track of this number is the best way to judge if you are getting paid on time or improving/decreasing.
Most businesses estimate how much they can spend based on how much they sell, but you’ll run into some serious cash flow gaps if the DSO flow is disrupted and not managed properly. Issuing and chasing invoice payments are critical to converting sales to invoices to cash and it’s one of the hardest parts to keep on top of as you go through any growth cycle.
Let’s walk through 3 tips & help bring down your average days:
Get the credit terms in writing up front
You just want to make the sale right? It’s very easy to dismiss the need to establish terms, especially when getting that exciting larger order! The tough love is that setting expectations with buyers helps establish ground rules, respect, and shows you have a professional organization with structured processes. Changing terms down the track can be difficult, especially with larger customers so breach the topic early, swiftly and never look back.
Communicate regularly about all things invoices
I hate asking for money! Wait, what? I can use it to communicate new offers or build a better relationship all while getting paid earlier, yup! The best way to get paid is to create a process around steady contact right from the moment the invoice is issued. Let your customers know the invoice/s is ready, make sure they got it and make sure it’s available to download, email or print with a touch of a button. One of the biggest threats to average days’ sales outstanding is a customers’ excuse of saying later on they had a question or dispute or never received it, resulting in it not being paid on time and causing cash flow stress on the business. You need to think “ripple effect”, what happens down the line, ripples to other areas in the future that you might not have foreseen.
Communicate at critical trigger points for payment. Right before the invoice is coming due, will put a sense of urgency around it for most customers and prompt payment right then or on time. If they do go past due, you’ll need regular reminders to let them know you’re that little monkey on their back until they bring accounts up to date. Realistically most people will pay you straight away if you send consistent payment reminders that follow a healthy, non-aggressive follow-up process.
Invoice on time – Build strong habits
Good one, I know this already! Do you, take a reality check and be honest with yourself.
Sometimes in the heat of the sale, we forget to send the invoice on time and that puts us behind before we ever get started and throws out signals to your buyer that you’re nice and relaxed to deal with, “you won’t care if I am late a few weeks.”
Make sure you setup regular time to handle your invoicing, the process of issuing invoices is as important as making the sales, just one day late can ripple down to days or weeks if you are on the end of month terms with customers and miss cutoff times for invoice submissions. If you don’t already have a business process documented for this one area, even if you’re a one man band, just do it already!
Got any more tips? Let us know below, we’re itching to hear from you :)