What qualifies as a “good” average DSO depends heavily on industry standards. For example, businesses with longer sales cycles, such as construction or manufacturing, may have higher DSOs due to extended payment terms. invoice-to-cash This DSO calculation means it takes the company six days on average to collect payment. However, if multiple reminders don’t receive a response, you should consider walking away from the customer.
Invoice to Cash: The Complete Guide to the I2C Process
- All invoice workflows integrate seamlessly with your ERP systems, letting you centralise invoicing, tax reporting, and approvals in one platform.
- It represents the average number of days that it takes your company to pay vendors, bills, and other outstanding invoices.
- The platform’s no-code setup means you can adapt processes without waiting on developers.
- This financial metric calculates how long it takes to collect payment after a sale.
Consider using a shorter payment term, such as a Net-14 instead of a Net-30. While you may lose some customers, this could save your company time and money in the long term. Companies can easily manage and reduce DSO with the wide range of tools available.
Reduce your DSO: Discover how ZoneBilling accelerates cash flow.
From the perspective of contract law, clear terms and conditions set forth in agreements can preempt disputes and provide clear recourse in the event of non-payment. For instance, a well-drafted contract will specify the payment terms, late payment penalties, and the interest rate contribution margin applicable on overdue amounts. Conversely, from a sales department’s viewpoint, a very low DSO might raise concerns about overly restrictive credit terms potentially stifling sales growth. Sales teams might advocate for a balanced approach that supports both sales expansion and reasonable credit terms.
Why Businesses Struggle to Reduce DSO
When communication is timely and consistent, invoices stay front of mind for customers, without your AR team having to chase manually every step of the way. Some companies turn to collections agencies or invoice factoring. Agencies typically take a large percentage of recovered amounts and may handle customers in ways that damage long-term relationships. Factoring is expensive to use continuously and can change how customers perceive the business. Moving from net 60 to net 30, or adding late fees, looks decisive on paper. On the ground, sales teams often promise extended terms to close deals.
Sometimes, however, inefficiencies and inconsistencies in a sales team can create leaks in your revenue stream. But striking the right balance between following up and pestering customers can be a delicate balance, posing a handful of distinct hurdles. 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. But recent interest rate hikes and a tighter lending environment have made maintaining healthy liquidity even more critical. According to Dun & Bradstreet, a DSO lower than 30 days is How to Start a Bookkeeping Business generally considered excellent, indicating that clients pay promptly, helping firms maintain a healthy cash flow.
- Even though not all businesses think their AR teams are equipped, automation can help.
- If a customer consistently delays payments, you must re-evaluate your strategy.
- A focused 30-minute diagnostic can reveal whether DSO is broadly healthy, slightly off track or a serious risk to cash flow.
- A global manufacturer reduced its DSO by 25 percent by implementing automated invoicing, digital payment options, and proactive customer communication.
- Over 10,000 users worldwide rely on Chaser to get paid faster, protect their cash flow and maintain good customer relationships.