Don’t leave money on the table: get your DSO faster than the industry
a blog series dedicated to Cash people
Only a small portion of our money is in the bank account. Most of our money is in the buyer’s pocket until they pay the sales invoice.
If you would need to choose only one KPI, it would be DSO, as it tells how fast your buyers pay their sales invoices to you.
DSO tracks the speed of your money flow
Diamonds are created under pressure, and many wealthy S&P 500 businesses with positive cash flow, are utilizing the dynamics of payment times.
They only use a very simple rule of thumb: keep sales invoice payment time (DSO) shorter than purchase invoice payment time (DPO).
If there is a difference in the payment times, cash problems are arising both in good and difficult times. During the strong growth, speeding up incoming cash is important due to raised costs. During the steady growth, the dynamics of payment times leave more money to investments or the repayment of loans. And during the downturn, cash is king.
DSO is affected by the late payments
Buyers pay on time only in a perfect world. The difference between the agreed and actual payment time is primarily seen in the bank account.
DSO tells the actual payment time of all sales invoices. The DSO is based on the actual payment time, which is affected by both the agreed payment time and late payments (the actual payment delays).
The direction is always more important than the absolute KPI value. A great goal is to have DSO faster than industry or your purchase invoices. Even small changes matter.
If the payment time of purchase invoices is 30 days, set your DSO target to 14. Money from sales invoices comes double faster to your bank account than purchase invoices leave.
Negotiate shorter payment times than your DSO target
Speeding up DSO is easy and can be done in two ways: minimizing late payments and also, shortening payment times. Before a deal with the buyer, check her predicted payment time based on the real-time risk profile.
Build your cash engine on advance payments or short payment terms: negotiate your payment times faster than your DSO. Make sure you are invoicing promptly.
Invoice financing as an alternative to speed up DSO
The biggest buyers with long payment times are the worst for your money flow. Advance payments or short payment times are not an alternative to this segment. In this case, when the buyer’s predicted payment time is longer than your DSO, use invoice financing, factoring or the sale of receivables.
Factoring means that you are selling your open sales invoices and get cash. In factoring, your ROI depends primarily on your credit rating, buyer payment times and the number of invoices.
Considering your total costs, it’s good to remember, that there are big differences in interfaces. Smooth invoice processing reduces alternative costs and the most advanced invoice finance services even provide insanely intelligent dashboards to you.
Supply chain finance arising due to negative yield environment
Multinational, cash-positive companies are facing challenges in the current negative yield environment. Cashflow is flying in, but now banks are charging, not crediting, for the funds sitting as deposits.
In supply chain finance, ROI depends mainly on your large corporate customer’s credit rating, as the margin is based on customer credit rating.
The dynamic discounting model is something that corporates create to obtain optimal cash discounts from you as a supplier. This is a digital cash discount auction for suppliers having a direct impact on profitability and ROCE, the return of capital employed.
riskrate is a superior 30 days cash forecast using data fusion and machine learning.
