I love the Lewis Carroll quote, ”If you don’t know where you are going, any road will take you there.” While often associated with the Cheshire Cat in Alice in Wonderland, interestingly, the quote doesn’t appear in the original book or movie. However, the message is clear and one I reference in many of my mentoring sessions – personal or career development. If you don’t have a clear goal, focus or destination in mind, you cannot plan or take actions that will get you on the road to achieving it. I recently found myself repeating this quote at a conference on collections and debt, specifically while discussing Days Sales Outstanding (DSO) reduction objectives for 2024.

DSO: A Key Metric for Financial Insights

Drawing on my experience leading a collections function during the 2008 / 9 financial crisis, I emphasise the importance of having a clear goal and a focused strategy (to achieve that goal). And DSO is a brilliant tangible metric to start with.

For the uninitiated, DSO represents the average number of days an enterprise takes to collect payment after a sale. This is measured from the date of invoice to the date of payment. It’s a great indicator of an organisation’s financial health and stability, and understanding and actively managing this metric is essential for several reasons.

Firstly, DSO directly impacts cash flow. Obviously, a high DSO indicates prolonged cash conversion cycles, potentially leading to liquidity issues. Conversely, a low DSO signifies efficient cash collection, ensuring the organisation has sufficient funds for operational expenses and investment in growth opportunities.

Secondly, monitoring DSO provides valuable insights into the effectiveness of credit and collection policies. By analysing average customer payment timelines, businesses can refine credit terms, set appropriate payment terms and identify potential credit risks. This proactive approach helps minimise bad debt and enhances overall financial risk management.

In this context, it is important to recognise the collections team as the gatekeeper of a company's financial health and a seriously underrated capability within many organisations. However, with the right tools, insights and resources, they can significantly impact profits and shareholder value.

DSO Optimisation: Key Questions to Reflect on

Do you know your DSO? How does it compare to the competition? What is the cost / value of one day in your organisation? If your goal is to improve collections / receivables in 2024, there is no better place to start than by understanding where you are, where you’d like to get to, the value you could create and the cost of achieving it.

Consider the example below, illustrating the current performance of a company with GBP 700 Million in sales revenue. Their existing DSO is 69 days. The payment performance is 39 days greater than the average terms, and the target is to get the DSO down to 45 days.

A) Average Terms 30 days
B) DSO 69 days
C) Cost of Financing (A-B x H) £4,487,671
D) Target DSO 45 days
E) Gap (B-D) 24 days
F) 1 Day Sales (Sales / 365) £1,917,808
G) Reduction in Invested Cash (F x E) £46,027,397
H) Interest Rate 6%
I) Annual Interest Reduction (H x G) £2,761,644

The Role of Analytics in Unveiling Patterns

While the 24-day reduction in DSO (shown in the example) may seem impossible, understanding the impact of invested cash and interest for each day’s reduction helps build the ROI case for investment in analytics, technology solutions and potential additional resources to drive the reduction.

Late payments are the primary driver of a high DSO, and advanced analytics can help uncover patterns. Who are the customers consistently paying, albeit tardily? Who are the customers always paying on the third reminder? What is the value in converting customers to Direct Debit? What are the optimum contact times for certain business types and so forth? This next level of insights will enable you to develop your collections strategy and tool kit, which should utilise automation, Artificial Intelligence (AI) and machine learning.

For many utility companies, the cost of collections and bad debt charges represent the most significant element of the total cost-to-serve. And while the economic pressure continues, investing time in detailed customer payment data and analytics, understanding the DSO and recognising its value in making informed and cost-effective decisions on a daily basis enable companies to reduce the DSO, optimise cash flow, enhance financial decision-making and maintain a healthy and resilient financial position in the market.

Setting a clear goal, gathering insights and planning the route to get there are the foundational steps in this journey.

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