When tax season ends, your firm shouldn’t have to wait for months to receive client payments. Getting paid immediately after accounting services helps achieve better cash flow for a more successful operation.
So many factors contribute to slow cash flow — including long days sales outstanding (DSO). DSO is a metric that reflects the effectiveness of your firm’s accounts receivables.
Today’s post will show you a few ways to reduce DSO, forecast your aging A/R, and choose the right tools for digital payments.
The Impact of DSO on Cash Flow
When late client payments affect your cash flow, it can disrupt your firm’s payroll, facilities, bills, and more. The sooner you get the cash, the sooner you can tackle operations costs and other expenses.
According to a Forrester study , “Almost 80% of respondents say it takes them more than 20 days to receive payment.”
Stopping these cash flow disruptions starts with calculating your DSO.
How to Calculate Days Sales Outstanding with DSO Formula
Make sure to calculate your clients’ DSO on a regular basis (monthly or quarterly), so you can avoid putting out fires in the future.
Here’s the formula to calculate your DSO:
DSO = (Accounts Receivables / Net Credit Sales) x Number of Days
For example: if your A/R had $100,000 and $75,000 in credit sales over a month, your DSO would be 40 days. This means it took an average of 40 days for clients to pay their invoices.
By using DSO data, you can then forecast your firm’s accounts receivables.
How to Use DSO to Forecast Accounts Receivable
Forecasting is crucial for cash flow projections and decision-making. With this method, you can use DSO to anticipate your accounts receivable.
First, determine your sales forecast, which is the number of sales you intend to make during a specific time period. Looking at past financial data is the easiest technique to build an accurate sales estimate.
Here’s the formula:
Accounts Receivable Forecast = Days Sales Outstanding x (Sales Forecast / Time Period)
Using the previous example, let’s say your sales forecast is $75,000 over 90 days (along with the 40 day DSO). The result A/R forecast is approximately $33,333.
Now that you have all your quantitative data, let’s get into some tips to reduce your firm’s DSO.
Ways to Reduce Days Sales Outstanding (DSO)
Even if you reduce a client’s DSO by a single day, it’ll count as an improvement to your firm’s cash flow.
Here are our tips to get your firm closer to shorter DSO:
- Gather and secure your clients’ payment and sales information.
- Automate as many tasks as your firm can — from payment reminders to data entry and payment processing.
- Send invoices to clients right after services are completed.
- Say goodbye to clients with irredeemable credit or payment history.
- Strengthen your client payment terms and late payment penalties.
- Streamline the invoicing process with digital billing and mobile payments.
- Unify your accounts receivable systems with integrations.
“Most (70%) B2B decision-makers are embracing bank debit (an automated, pull-based bank-to-bank transfer, known as ACH debit in the US) more than check payment, which stands at 64%,”
According to the same Forrester study mentioned above.
Creating and implementing a process with these steps can help chip away the amount of days sales outstanding. Having the right products in your toolbelt also gets you ahead of cash flow disruptions.
Reduce Days Sales Outstanding with Our Suite
Get your full invoice amount sooner with our digital suite. Take a look at what each of our solutions offer:
Pay Now
Accept a wider array of payments with ACH/EFT and Card. Clients can use what’s already in their wallet and pay 24/7 in a convenient online portal.
Pay Over Time
Financial flexibility makes it easier for clients to pay your firm back on time — no more waiting months for a full payment! Let them pay over 3, 6, 9, or 12 months while you get paid in full every time.
Connect
Automation saves time spent on chasing client communications, along with other manual tasks. Integrate your practice management system with client payments.
So if you haven’t already, consider streamlining and digitizing your payment process for this new year.
Reducing DSO not only smooths your cash flow, but it makes client communications, digital tools, and accounts receivables more manageable.
Wait no longer for non-paying clients. Schedule a demo to see how we can reduce your DSO.
