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Outstanding Receivables

When looking at business finances, pay keen attention to outstanding receivables. This is money that your customers owe you, so it affects the total amount of money coming in. Tracking this balance gives you a more accurate picture of business finances. It also provides the data you need for cash flow management.

What Are Outstanding Receivables?

Closely related to days sales outstanding, this metric tells you how many days, on average, it takes your customers to pay their invoices. Companies measure DSO to determine the efficiency of the accounts receivable team.

To calculate this, divide the accounts receivable by the total credit sales and multiply it by the number of days in the period. For example, if you had $100,000 in receivables and $200,000 in credit sales last month, your DSO would be 15.

First, divide $100,000 receivables by $200,000 in sales. Then, multiply the 0.5 by 30 days in the month.

What Are the Limitations of Accounts Receivable Days Outstanding?

Before you get started with this metric, it’s essential to know what the limitations are and how to address them. Consider the following.

The Quality of Your Receivables

This metric doesn’t take into account the quality of your receivables. Just because you have a lot of receivables doesn’t mean they are all in good standing. Make sure you have a process to track which invoices are unpaid and follow up accordingly.

Timing of Sales

This metric can be affected by when you make sales. For example, if you have a lot of sales at the end of the quarter, your DSO could be lower because there’s less time for customers to pay their invoices.

Changes in Payment Terms

Changing your payment terms (for example, from net 30 to 60) will impact your DSO. Make sure you adjust the metric accordingly to compare apples to apples.

What Are Some Best Practices for Improving Accounts Receivable Days Outstanding?

One of the best ways to address the challenges associated with accounts receivable outstanding is to follow established best practices. These developed after countless other businesses implemented and used the metric and made critical findings.

Invest in researching creditworthiness at the start.

Proper research will save you time and money in the long run by ensuring you’re only extending credit to customers who are likely to pay on time. When the customer’s creditworthiness changes, adjust accordingly.

Develop a clear invoicing process.

Established processes should include when you send invoices, how you send them, and what you add to the invoice. Whenever possible, give customers options on how to receive invoices because it improves the likelihood of receiving and paying them on time.

Automate the process as much as possible.

The more you can automate, the more you save. This includes automating customer communication, payments, and invoicing. You can even use automation to calculate the metric and provide real-time updates as new information comes in.

Use multiple methods to follow up on receivables.

Don’t just rely on email or one phone call to collect receivables. Use a combination of methods to increase the likelihood of getting paid. These might include mail, phone calls, and in-person visits.

Enforce late fees.

If you don’t enforce late fees, you effectively give customers a free loan. Be clear about your late payment policy from the start and follow through with it. While some instances will arise that require leniency, make leniency the exception and not the rule.

The Bottom Line

Managing past due receivables is critical for keeping adequate cash coming into the business. Understanding the limitations and implementing best practices can strongly impact improving the performance of the accounts receivable team.

Those that are familiar with the workforce management space need no introduction to Monday.com and its powerful work OS tool. Monday.com recently moved to an automated accounts receivable (A/R) collection system, powered by Gaviti, to replace its outdated annual reporting methodology.

From Monday.com’s accounts receivables department:

With our business and sales growing exponentially, Gaviti has been a key tool in ensuring our DSO has not only stopped increasing but also shown improvements over a relatively short period of time. The ease of use combined with a highly responsive and helpful team… We have been able to quickly implement a comprehensive and versatile collections process.

When you stop to consider the broader, organizational benefits of automated A/R solutions, it’s easy to understand why Monday.com was so successful. The right A/R collection software can improve cash flow as well as the performance of key metrics – such as days sales outstanding (DSO) – within your organization.

Improve DSO Collection Processes

At its core, DSO collection is a cash flow problem. According to a U.S. Bank study, 82% of businesses fail due to poor cash flow management.

Part of this issue is attributable to the time-consuming processes inherent in manual collections. DSO collections and cash flow already vary from month to month. When you add the time spent managing spreadsheets across late payments, grace periods, and lines of credit, you have an untenable system where staff spends more time corralling reports than processing payments. And while you may not enjoy managing the nitty-gritty details of your business’s finances, your financial processes are ripe for optimization. Consider just a few ways that accounts receivable collection software can streamline your enterprise DSO:

  • Collect on accounts when they’re due with automated customer reminders
  • Create a single source of truth with a centralized A/R database that eliminates the need for tracking/compiling across different spreadsheets
  • Faster invoicing through the elimination of unnecessary payment delays
  • Standardize your process for consistent, repeatable collections every time
  • Streamline payment collection for clients, decreasing the odds of entry errors and making it more likely you’ll get paid on time

When you work to improve your accounts receivable collection, you’re working toward a healthy financial process where DSO stays low. But that’s not the only benefit of an A/R collection solution.

Stay Informed

5 Benefits of Automated Accounts Receivable Collection

In any discussion about the benefits of accounts receivable automation, it’s important to cover the broader benefits it provides:

  1. Better staff efficiency by reducing the manual hours required to perform collections tasks – all those hours you spend chasing invoices, calling clients, or writing follow-up emails add up.

  2. Ensure your data’s accuracy – real-time accurate data will prevent your company from making errors.

     

The benefits of the accounts receivable collection software are clear, and once you’ve deployed
automation,
you’ll have a hard time going back.

A/R Collections Best Practices

Although automated accounts receivable software brings a new dimension to your financial processes, the fundamentals of accounts receivable best practices remain the same. It’s a straightforward process that nevertheless tends to get bogged down by inefficiency. This is where automation software pays off.

Consider how you can leverage financial technology like this throughout your organization to improve key financial metrics. Technology is one option. Outsourcing accounts receivable collections to a service provider that can handle all the details for you is another. You have plenty of options, and now it’s just a matter of selecting which improvements will yield the best results for your enterprise.

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