Cash is king. It always has been and always will be. But your cash has a sneaky habit of playing hide-and-seek in your balance sheet, especially in that pesky Accounts Receivable line item. And that, of course, puts your days sales outstanding (DSO) under a bright spotlight.

Today, we're discussing some essential DSO best practices to help keep your cash flow consistent and reliable, from leadership's role to technology and everything in between. Want to see how some companies have slashed their DSO by up to 40% within just 90 days? Then you came to the right place.

Cash Management: Beyond the Bottom Line

While net profit is the ultimate priority for any business, cash flow is a dead heat for second place. It's the lifeblood of your company, fueling operations, investments, and overall financial health. That means DSO management should be top-of-mind for CFOs, controllers, and other corporate finance leaders, even though it’s often treated as a minor concern. And while there's a laundry list of reasons why DSO is the unheralded foundation for your financial health, a few really stick out.

Liquidity Matters, Especially Now

Yes, having easy access to cash is always crucial. But recent interest rate hikes and a tighter lending environment have made maintaining healthy liquidity even more critical. Companies with bloated DSO metrics are sitting on a pile of unpaid invoices, potentially leading to cash flow problems that can quickly limit their ability to operate effectively, especially when economic uncertainty lurks.

Slashing your DSO is like unlocking a hidden cash reserve, giving you the flexibility to seize opportunities and navigate unexpected challenges.

Profit Isn't Cash Flow

Even if EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) looks great on paper, it doesn't necessarily tell the whole story. A company with high EBITDA can still struggle with cash flow if customers are slow to pay. Highly leveraged companies can even find themselves in a place where they have strong EBITDA but are losing money and are on the brink of insolvency if their interest expense is out of control

Think of it like this—EBITDA shows how much money your company theoretically makes, while cash flow reflects the cold, hard cash actually entering and leaving your bank account. Reducing DSO ensures your EBITDA translates into real, usable cash you can devote to growth and profitability.

Taming DSO Lowers Risk

High DSO can dry up the capital pool and increase financial risk. Outstanding invoices are essentially unpaid debts, which can cost you revenue and, if severe enough, result in your own stack of bad debt—a bitter irony. However, implementing disciplined procedures to reduce DSO ensures timely collection of receivables, improving your cash flow and reducing the risk of such defaults.

Potential DSO Reduction Challenges

While the road to lower DSO might be paved with good intentions, there are plenty of potential potholes and detours ready to throw you off course. To name a few of the more problematic areas:

Collections and the Art of the Gentle Nudge

When it comes to collecting payments, consistency is key. But striking the right balance between following up and pestering customers can be a delicate balance, posing a handful of distinct hurdles.

• Inconsistent Follow-Up: Letting overdue invoices languish unnoticed creates a culture of late payment. This can lead to a domino effect, with customers becoming accustomed to slow payments and further extending their settlement times.
• Unclear Payment Expectations: Confusion around due dates and potential late fees breeds delays and disputes. Further, unpaid invoices can tie up your cash flow, hindering your ability to meet financial obligations or invest in growth opportunities.
• Awkward Payment Discussions: Likewise, avoiding late payment conversations perpetuates a cycle of delinquency. This can strain customer relationships and make it even harder to collect outstanding balances in the future.
• Silent Treatment Doesn't Work: A lack of communication with customers keeps you in the dark about potential payment roadblocks. This can lead to missed opportunities to address issues proactively and prevent delays. Many customers will take silence as approval and extend payment terms indefinitely.

A Leaky Sales Process

A smooth sales process is the foundation for efficient collections. Sometimes, however, inefficiencies and inconsistencies in a sales team can create leaks in your revenue stream.

• Sloppy Billing: Oftentimes, the number one issue with collections stems from bad billing practices. Inaccurate or incomplete invoices lead to delays and customer disputes. This can not only slow down collections but also damage your brand reputation and customer trust while frustrating customer AP contacts
• Discount Disasters: Uncontrolled discounts and credits can erode your profit margins. Allowing customers to take unearned or unapproved discounts wrecks your financial reporting, soils your AR reports, and causes further billing problems. Thus, unapproved reductions can significantly impact your bottom line and make it harder to maintain healthy cash flow.
• Documentation Deficiencies: Missing or incomplete paperwork creates confusion and slows down collections. Incomplete information on invoices can lead to delays in processing payments and resolving discrepancies.

When Technology Becomes the Problem

The latest and greatest tech—Enterprise Resource Planning (ERP) systems, in particular—can be powerful financial management tools. However, a poorly implemented or misused ERP system can create more problems than it solves. Here's why a rushed approach to ERP can backfire:

• Rushing the Implementation: A rushed ERP implementation can disrupt existing workflows and create data migration headaches. This can lead to further delays in collections and potentially even impact other areas of your business.
• Tech as a Magic Solution: Simply implementing an ERP system won't fix underlying process issues. These inefficiencies can become embedded within the new system, making them even harder to address in the long run.

Ignoring the Human Factor

Achieving lower DSO requires a holistic approach, considering both processes and the people involved. In fact, failing to consider all stakeholder perspectives can make your DSO reduction efforts go sideways in a hurry.

• Burnout in Collections Teams: Constant pressure to collect outstanding payments can lead to burnout among collections staff. Especially when they’re not empowered to work bad billing practices, demoralized and overworked teams are less effective, limiting your ability to optimize DSO.
• Sales vs. Collections Tug-of-War: Friction between sales and collections teams can create a dysfunctional dynamic. Sales might prioritize closing deals without proper attention to payment terms, leading to collection headaches later.
• Silent Stakeholders, Missed Opportunities: Failing to consider the perspectives of all stakeholders involved—customers and finance, to name just a couple—can lead to missed opportunities for improvement. Internally, faulty communication across departments makes it very difficult to identify and address the root causes of slow payments. And that's not great.

DSO Best Practices to Jump Start Cash Flow

Addressing potential hurdles on the path to DSO Shangri-la doesn't have to be an incredibly heavy lift for your team. To get you started, we've collected some proven strategies you can quickly implement to streamline your collections process and get that DSO in check.

Teamwork: The Unflinching DSO Must-Have

DSO reduction can’t be a one-person show. An effective collections process takes a village, requiring a collaborative effort across departments and breaking down silos to supercharge your collections game. For starters:

• Involve the A-Team: Bring together your operations, sales, accounting, and finance teams. Each department offers a unique perspective that can help identify and address bottlenecks in the collections process.
• Communication is Key: Open communication between departments fosters a culture of accountability and ensures everyone is on the same page when it comes to collections procedures.
• Visibility and Reporting: Get everyone on the same page by increasing visibility into your accounts receivable. Use detailed reports and real-time information—via data dashboards—to keep all departments informed about outstanding payments. Once again, this collaboration can help identify bottlenecks and ensure everyone is aligned and working toward reducing DSO​.

Communication: The Cornerstone of Collections

Speaking of communication, the ability to clearly and consistently communicate with customers is crucial for timely payments. Even better, a few simple tweaks can get you on your way.

• Regular Check-Ins: Don't be afraid to follow up on outstanding invoices. Establish a regular follow-up cadence, with automated reminders and personalized outreach to nudge customers towards on-time payments.
• Normalize the Conversation: Talking about money and past-due accounts can feel awkward, but it doesn't have to. Develop clear and professional communication for discussing payments with customers, focusing on resolving any issues and maintaining a positive relationship.
• Leverage Technology: Automated systems can be your secret weapon for consistent communication. Utilize email and SMS reminders to keep invoices top-of-mind for customers, using these tools to track inbound and outbound communications between collections team members and the customer.

Billing Done Right: The Foundation for Faster Payments

Accurate and timely invoices are the foundation for efficient collections. Here's how to optimize your billing process to avoid delays and disputes:

• Gather Upfront: Collect essential information from the start—like purchase order numbers and key contact details—to avoid delays in processing payments down the road.
• Get it Right the First Time: Double-check invoices for accuracy before sending them out. This includes verifying customer information, order details, and pricing.
• Early Payment Discounts: Offer small discounts or other incentives to encourage early payments. This strategy not only boosts your cash flow but also builds customer loyalty by rewarding timely payments. It's a win-win, as long as discounts are offered and utilized with discipline.
• Convenient Customer Payment Options: Make it as easy as possible for your customers to pay you. Offer various payment methods like credit cards, bank transfers, and online payment portals. The easier you make it, the quicker you'll see the cash flowing in​​.

Credit Management: Guarding Your Revenue Stream

Effective credit management helps you mitigate risk and ensure customers are creditworthy. For starters, you can tighten up your credit practices with:

• Regular Reviews: Conduct regular customer credit assessments and update your credit policies accordingly. This helps you identify potential credit risks and adjust credit limits as needed.
• Setting Limits: Establish appropriate credit limits for each customer based on their creditworthiness. Doing so helps control exposure to bad debt and safeguard your revenue stream.

Technology: A Powerful Tool, Not a Magic Solution

Technology can be a game-changer for collections. However, as we previously discussed, it's not a silver bullet. Long story short—make sure you use technology wisely, beginning with:

• Automated Reminders: Use automated systems for invoicing processes and reminders to reduce manual processes and errors and speed up the collection process. Automation ensures consistent follow-ups, significantly improving your chances of getting paid on time​. It also frees up your team's time for more complex collections tasks.
• ERP Integration: Ensure your collections system integrates seamlessly with your ERP for smooth data flow and efficient invoice management.

Continuous Improvement: The Never-Ending Quest for Lower DSO

DSO reduction is an ongoing process, not a one-time fix. In other words, it's important to cultivate a culture of continuous improvement by:

• Embracing the Journey: Adopt a continuous improvement approach, regularly assessing your DSO performance and identifying areas for optimization.
• Addressing Bottlenecks: Don't let bottlenecks slow you down. Proactively identify and address any roadblocks hampering your collections process.

Seasonal Businesses: Conquering Cash Flow Fluctuations

Seasonal businesses face unique challenges when it comes to DSO. Here are some strategies to navigate cash flow fluctuations if your customers fall into this category:

• Cash Flow Forecasting: Develop accurate cash flow forecasts to anticipate seasonal peaks and valleys. This allows you to prepare for periods of slower collections.
• Adapt Processes and Staffing: Consider adjusting your collections processes and staffing levels to accommodate seasonal variations in billing activity.

Healthcare Collections: Decoding the Maze of Insurance

Healthcare collections involve navigating the complexities of insurance reimbursement and their seemly unending and byzantine rules and procedures. To tackle this unique challenge, you need:

• Understanding of the System: Educate yourself and your collections team on the intricacies of healthcare insurance and reimbursement processes.
• Negotiation Savvy: Develop strong negotiation skills to navigate discussions with insurance companies and ensure timely payments for your services.
• The Right Technology: Use technology to tackle the complexities of healthcare collections. Use automated systems and data analytics to improve communication with insurance payers and ensure timely reimbursements.

Embark—Your DSO Virtuosos

So there you have it, a rough roadmap to slashing your DSO and freeing up trapped cash flow. Although our discussion has been pretty high-level, our goal was to get you started on the right foot. Ultimately, you need solutions that leverage your strengths and address your weaknesses to truly get your DSO under control and cash flow, well, flowing. And that requires a special brand of know-how. 

That's where Embark enters the fray, bringing industry insights, real-world best practices, and decades of collective experience on the AR frontlines, all to transform your DSO into your secret cash flow weapon. That quick blurb up top about reducing DSO by up to 40% in just 90 days? That wasn't hyperbole.

So, let's talk about accounts receivable management, diagnose that DSO, and get your cash collections in tip-top shape. Your stakeholders—and financial statements—will thank you.