Collections Recovery: Reducing Your DSO
The most common challenge for suppliers selling products and services to businesses on open terms is the recovery of invoiced receivables within a timely manner. DSO or “days outstanding” refer to the average number of days an invoice is actually paid regardless of the net terms actually sold. In today’s cash strapped business environment, many companies aren’t paying their invoices to their suppliers within agreed upon terms and businesses in all industries are feeling the effects of interrupted cash flow as they wait for their customers to make payment.
In response to the domino effect of the cash drain caused by slow paying customers, many suppliers attempt to create their own internal collections departments and take on the burden of collecting their own invoices. This tends to be an ineffective and costly process for most companies due to the skill and advanced systems required to be effective in recovery. It is critical not to alienate customer relationships while attempting to collect a debt and many companies do not strike a balance between utilizing both soft and aggressive approaches to collections resulting in limited success with consistent and timely recoveries. The net result for businesses that attempt to collect in-house without the necessary systems afforded to most collections companies are higher operating costs and inefficient results leading to longer DSO cycles that continue to drain company cash flow.
Outsourcing the collections efforts of a company’s accounts receivable simply makes good business sense. While there are many different collections programs on the market today, they are not all created equal. The longer a debt remains unpaid the likelihood of default increases, and therefore, it is important for companies to turn over their delinquent accounts sooner in the delinquency cycle than later. Debtors turned over to the right collections company earlier in the process are handled with care and the softer approach greatly increases recoveries while older debts are handled more aggressively. With a two step process to collections recovery, DSO is proven to get shorter and shorter for many companies at low cost surprising to many business owners.
With companies struggling to gain market share and capital becoming less and less available, businesses must improve their collections recovery programs in order to survive. Outsourcing these functions to a reputable collections firm – early in the game – is a wise decision and is proven to reduce the amount of time receivables are recovered at a cost lower than in-house programs. In our next article, we will discuss the different type of programs available and the various approaches that can be implemented.
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