A/R , A/P, ROI, GAAP – Accounting seems to thrive on acronyms. But there is one you may not be aware of, and it really drives the success of your business: DSO
Days Sales Outstanding is a ratio that tells you the significance of how much money your customers owe you. You may know that your Accounts Receivable total is $35,000. Is that good or bad? If your annual sales are $100,000, then your DSO is 128 (AR/annual sales X 365). That means it takes 128 days to collect that $35k total. But if your annual sales are a cool million, then your DSO is only 13.
So why is that important? Because money on the books is not money in the bank. Let’s say you have that 128 number. How many credit card statement cycles happen in 128 days? About four. So the Starbucks you drank this morning and put on your credit card is going to accumulate credit card interest four months before you pay it. What’s your interest rate on your card? Probably around fifteen per cent. How much do you really want to pay for that cup of coffee?
That may be an extreme example, but you get the point. You want your money in sooner. Do you want to tell your employees they can’t get paid this week because your customers aren’t paying you fast enough? Not if you want them to show up on Monday morning, you don’t.
Now that you’re scared, what can you do to prevent disaster? Let’s look at some simple steps to help you get that DSO to a manageable number:
- Expectations – Make sure your client clearly understands your payment requirements before you start doing business with them. Put it in your contract or engagement letter. Is there an upfront deposit? Do you give a discount for early payment? What are your terms? Can they mail you a check, or do you require an ACH? Spell it all out with detail in your initial agreement. This will eliminate surprises for both of you.
- Communicate – As soon as appropriate, send the invoice with a clearly visible due date. Snail mail? Sure, if you want the snail to bring you a check. We all live in the Cloud now. Send the invoice electronically. Even better if it has a Pay Now button on it. That increases your odds of getting paid early. Early! Imagine that!
- Communicate Again – A couple of days before the invoice is due, send a reminder. Don’t be boring! Make it a cheerful, friendly reminder that it’s time to pay. You might even make it funny. Your client is a lot more likely to hit that Pay Now button when he or she is in a good mood.
- Remember your manners – Send a thank you note. It’s nice to be thanked, but it also gives your client an acknowledgment that you received the payment. How many times have you bolted awake in the middle of the night with the thought, “Did I pay Acme for those anvils??” If Acme uses a thank you system, then you can just fluff your pillow and go back to sleep because you know you can check your email for the thank you message that answers your question. Wouldn’t you like your clients to sleep peacefully? Send them payment thank you letters.
- “But I did all of that and I STILL haven’t been paid!” What was that word we were using? Oh, yes. Don’t sit at your desk staring at your A/R list grumbling under your breath (or out loud), Communicate! Send another reminder email. Again, keep it friendly. There could be a really good reason why you haven’t been paid. Maybe your client’s son had an emergency appendectomy while climbing Mount Everest and the client had to fly to Nepal. Or some other entirely possible thing that kept your client too preoccupied from hitting that Pay Now button. Or print a check. Or initiate an ACH.
- Stuff happens. Maybe your client hasn’t paid because he’s waiting for HIS client to pay. Communication is information. If you know the circumstances, you can offer a payment plan. Sure, you’d like that whole invoice to be paid today, but isn’t half of it better than none of it? Yes. It is. Offer a payment plan if you need to. The client will appreciate it.
- Automate – Invoice Sherpa can handle this for you. With customizable templates, Invoice Sherpa sends out the invoices, the reminders, the thank yous, the second notices, etc. Do you want to chase invoice payments, or do you want to grow your business? Or maybe you want to climb Mount Everest yourself. If your money comes in faster, you might just be able to take that trip. Try Invoice Sherpa free for 30 days and see the results you’ll get.