Strategies for faster payment collection in a cash-strapped crisis.
As the economic impacts of COVID-19 continue to unfold in the United States and around the world, many organizations face hard decisions. For example, a recent survey of finance executives by CFO found that 50% of organizations are scaling back or delaying investments right now, while 35% are laying off or furloughing workers. Cash flow is a top concern for finance executives (66% of respondents), second only to the length of the economic downturn caused by COVID-19 (68%).
If your company is slashing discretionary spending, lengthening its payables, and making some difficult near-term choices about the business, you’re not alone. Once you’ve made the most immediate decisions about your company’s survival, the next step is considering the mid-term strategies you will need to implement over the next three to six months to ensure ongoing liquidity.
For this month’s metric, we discuss days sales outstanding (DSO), which measures the average number of days it takes an organization to collect payments from its customers. Because this measure is directly linked to cash reserves and liquidity, working toward the best possible DSO is an essential strategy in moments of downturn and crisis.
Data from APQC’s Open Standards Benchmarking® database shows that top performers on this metric get paid in 30 days or less, while bottom performers take 48 days or longer to collect. These figures reflect cross-industry data, and a “good” DSO score will vary from one industry to another. For that reason, it’s important to benchmark relative to other organizations in the same industry for a comprehensive assessment of performance.
Cash More Quickly
There is good reason to believe that DSO will go up across the board in the coming months, as organizations work to lengthen their payables to maintain a stronger cash position. What can organizations do during an undoubtedly chaotic time to keep DSO as low as possible and continue bringing cash in?
The good news is that the best strategies for improving DSO are still effective. While organizations can’t always control when (or whether) a customer sends payment, one area they can control is optimizing and streamlining accounts receivable (AR) processes as much as possible. Invoice errors delay the time it takes to get an accurate invoice to the customer, which in turn delays the time it takes the customer to pay. If your AR processes are resulting in invoice errors — or your employees are spending far too much time on paperwork — automation can make a decisive impact in this area.
In its Open Standards Benchmarking Customer Credit and Invoicing research, APQC has found that survey respondents that invoice 80% or more of their invoice line items electronically or automatically have a significantly lower DSO (30 days) than survey respondents that invoice 20% or less of their invoice line items electronically or automatically (55 days). Beyond reducing cycle times for invoicing, automation enables faster payment. Both help bring in cash more quickly.
As your organization works to cut costs across the board during, it may feel like this isn’t the right time for new automation projects. In fact, the opposite is true: APQC’s member organizations are telling us that COVID-19 is largely acting as a catalyst to accelerate digital transformation projects (including automation) rather than bringing them to a standstill. And automation has been shown to generate significant bottom-line benefits in a short time-frame: One large commercial bank we studied saw a 150% return on investment after a t10-week automation pilot for booking delinquent payments and for invoice entry and tracking. Even now, automation is a smart bet if done well.
Understand Customers
While automation undeniably works wonders to help lower DSO, all the automation in the world won’t bring in cash from customers that are delaying payment. As organizations work to streamline their processes, they should also conduct customer and customer-segment analysis, particularly on high-value customers. Examining the payment histories of major customers and customer industry segments will give a clearer picture of which customers are generally slow to pay and which might be paying more slowly in the future.
There are a range of strategies and tools at an organization’s disposal to collect from customers more quickly, including updated payment terms, early pay incentives (or late payment penalties), and credit restrictions. All of these strategies should be on the table to ensure a company’s ability to keep paying its expenses in the middle of a crisis. They have also proven effective in pushing back against buyers that seek unfavorable payment terms from suppliers.
A word of caution is in order, however: Be careful not to burn bridges with your customers. In last month’s column, we discussed the relational pitfalls of extending an organization’s days payable outstanding (DPO) too much. DSO is the other side of the coin: Especially for its most strategic and mutually-beneficial relationships, an organization may need to collaborate on a compromise that keeps the relationship strong. While the preservation of your company is the highest priority, keeping that high-value customer might make it worth accepting slower or lower payment as you and your customer work through the crisis.
Perry D. Wiggins, CPA, is CFO, secretary, and treasurer for APQC, a nonprofit benchmarking and best practices research organization based in Houston, Texas.