It’s no secret that growing a wholesale business means offering credit terms.
The juggling act begins when cash conversion from sales slows down, as creditor payments become stretched.
Getting customers to make their payments on time is critical to improving the supply chain and staying liquid. Naturally, wholesalers invest in robust accounts receivable departments to track customer payments and streamline cash inflow. Gauging the effectiveness of their accounts department means monitoring the company’s Day Sales Outstanding (DSO).
In accountancy, Day Sales Outstanding (also called DSO and days receivables) is a calculation used by a business to estimate the average number of days it takes for a debtor to pay them. It is a financial ratio that illustrates how well a company's accounts receivables are being managed.
A lower DSO is an indication that your business quickly converts sales to invoices, then into cash, while a higher DSO highlights an underlying issue in invoice collections. In most cases, your business's cash flow is strained by overdue payments, caused by yielding collections practices or increasing trade credits.
If you’re looking to get a bird’s eye view into your cash flow, we recommend Float Cash Flow Forecasting, to get the big picture and view exactly what your cash flow will look like in several months or even longer.
Wholesalers that let trade credits creep in encourage poor buying habits and payment term abuse across their customer base. If your DSO grows month on month, it could seriously impact company cash flow. This is because it is locking up cash your company would have on hand to pay bills and re-invest back into profit generating activities.
Regular checks on DSO can help you proactively manage it. Here’s our three tips:
Digitise & automate your billing systems
To keep the DSO gauge down, it is crucial that your accounts receivable department has an efficient payment collections system in place. Clear payment terms and timely billing are your path to a solid collections strategy.
The quicker you invoice customers, the faster your business gets paid. For wholesalers that still rely on a paper billing system, upgrade to digital invoicing right now.
Digital invoicing options like Xero, MYOB or QuickBooks Online can make it easier to reduce a high DSO. By streamlining your billing process electronically, it speeds up the time it takes your company to invoice its customers. Automation prevents most human errors by removing manual or paper-based payment processing.
Set up consistent payment communications
The easiest way to hold customers accountable- making sure overdue invoices are not ignored - is to send out consistent payment reminders.
Instead of only emailing reminders, your accounts receivable department should follow up via a vertically integrated channel of communication like text reminders and collections calls.
By following up over the phone after the initial invoice, you add a human touch to your collections process, build your customer relationships and ensure invoices get paid. Also consider rewarding early payers and use calls to double up as sales calls to communicate new offers.
If you’re yet to streamline your processes, we recommend Debtor Daddy to automate your reminders, from calls through to collections. Best of all, it integrates with popular invoicing software like Xero, MYOB and QuickBooks Online.
Offer customers multiple payment options
You’d be doing well to keep your DSO at 5 to 15 days longer than your agreed credit terms.
You’d be planning your cash conversion generally arriving 5-15 days later than your published credit terms (Net 30 becomes 30+15). You need to be honest with yourself and determine if you can afford to float (finance) your customers to 45 days or more. Understanding how only a small improvement in days outstanding can impact the entire operation is critical to your success.
Having a healthy cash flow does not mean that your company cannot offer a competitive payment policy.
To eliminate heavy handed collections or to offer extended credit terms and win new business, you can install a third party credit line. The credit line will tap into money owed from unpaid invoices, allowing you to draw funds as needed and extend credit terms as required.
These credit lines offered are complementary to your automated collections and cash flow forecasting software listed above. In addition to pin pointing cash flow crunches and speeding up collections, you now have funds ready at your finger tips to tackle instant requirements.
By implementing the line of credit from financial providers like Waddle, your customers get flexible terms and can still access funds upfront.
Waddle provides wholesalers with fully customisable funding options allowing them to dynamically build credit lines from customers.
This way, businesses can tackle larger accounts and win profitable supply contracts knowing they can draw funds the moment stock leaves the warehouse.
Waddle helps solve the DSO gap and simultaneously allows you to offer best-in-class payment terms to buyers.