The InvoiceSherpa Blog

What Is Days Sales Outstanding

Have you ever heard of days sales outstanding? If you run a business you need to! Think of it like the pulse of your business. It's a way to measure how quickly you're getting paid when you bill or invoice a customer. It's critical because every business runs on cash and if you run out of it, you're business can quickly go from stellar performer to broken down on the side of the road. So lets look at why it's so important.

Lets imagine this month you bill your customers $20,000 for your awesome service or product, that feels good right? You're $20k richer right? Not so fast, an invoice or bill isn't cash and the bank won't take an invoice and deposit it into your account so how do you actually get that $20k in cash? Well of course you expect your customers to pay you and certainly a lot of them will without any work from you at all, but when they pay you will vary and some actually won't pay you at all.

When this happens your days sales outstanding starts to increase and this is very very bad for the business body. It's like a sharp increase in cholesterol, never a good sign. So how do you combat this problem and keep your business days sales outstanding in the healthy category?

Communicate, communicate, communicate

The best way to stop this trend is at the beginning, like preventative care instead of major surgery (wow I am really into the health analogies today). When you first send an invoice to your customer you should reach out to them immediately to make sure they got the invoice and that they don't have any questions or concerns about it. This gives them an upfront shot at disagreeing with it or asking questions or for changes. After this it's going to be hard for them to argue you later that something is wrong when they already agreed to it. Not unheard of, but a lot less likely. When trying to combat an increasing days sales outstanding problem this is a great first shot.

Next, set a reminder to follow up right before the invoice is due, this give you time to collect payment before the invoice is actually do and put a sense of urgency into your client. We generally suggest calling 24-48 hours in advance to alert them that it's almost time to pay their invoice. Many clients will pay right then and there just to get it done. But they wouldn't have done it if you hadn't bothered to remind them.

Why do most businesses get in trouble here?

It's simple, it's hard. And it's not what you got into business for in the first place. Whatever your industry, no matter your craft you undoubtedly didn't get into business to track down receivables and we can't blame you days sales outstanding is a painful and arduous process, but none the less it's a fact of life and if you ignore it you can quickly find yourself in some scary situations unable to make payroll or pay rent on you office.

We create InvoiceSherpa to handle the days sales outstanding process from beginning to end. We completely automated (seriously!) this whole process and make this headache vanish. Basically we handle all of the communication for you and make it super simple to make sure you get paid. We even handle situations where invoices need to be sent to a collections agency or small claims attorney. Give us a call today if that sound like some we can help you with!

Posted on January 23, 2014

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