07Aug

Happiness is a positive cash flow ~ (Fred Adler – Venture capitalist) ~

Most of us in business or in sales have heard this – Revenue is vanity, Margin is sanity and …Cash is king. I have written about the importance of tracking cash flow related metrics in one of my earlier posts and now want to capture some of the “hows” behind the “whats”. A commonly known and accepted metric for measuring and tracking the cash flow situation in a company is the DSO* or Days Sales Outstanding. DSO is used to determine the effectiveness of the order to cash process of the organization as it depicts the average number of days it takes to collect an order and turn it into cash after a sale has been made. The lower the DSO number, the less time it takes to collect receivables and the better you are able to manage your short and long-term business needs.

While technology plays an important role to make your collections process as efficiently managed as possible, it is my firm belief that no technology can provide benefits the way it is meant to unless there is a clearly defined process and enough checkpoints in the system. Every stakeholder needs to know his/her role in the process and have access to the information necessary to focus on functioning in the most efficient way possible given that this process involves multiple functions (sales, billing, treasury, collections) or in the case of small businesses the same person wearing multiple hats.

Here are five simple steps that have worked for me in streamlining the order to cash process and improving the DSO metric:

Step # 1 – Start at the beginning: Before you make that sale, have you checked what payment terms are you agreeing to and what conditions need to be fulfilled to trigger the payment from the customer? This is where sales plays an important role.  When and how the payment will be received is as important as how much; and will save a lot of time for people downstream if sales negotiations take these too into consideration. For services contracts, payment milestones should be structured in a way that your spend is aligned and not more than the cash inflow at any point of time. Negotiate the best terms possible and make sure that the terms are clear to both you and the customer and are recorded.

Step # 2Update your records: Once the sale is made, whether you do it manually (through a simple Excel) or through a tool like SAP, record the important information in a tracker and set reminders. The minimum information should include the date when the invoice has to be raised, the date that it falls due, the supporting documents that are needed to get the customer approval on the invoice, who and where the invoice needs to be sent to, and the mode of payment. Review this information periodically and ensure that it is up to date.

Step # 3 – Communicate: Make sure that every stakeholder knows what is expected of him/her in advance so that people are not scrambling around after the invoice is due. For example, this could mean the delivery team knowing that there is a requirement for signed acceptance certificates for a product or time-sheets for a service, the treasury team knowing that a performance bond is needed for payments, the invoicing team to raise the invoice on the exact date that it can be raised and not waiting for the end of the month or the sales team knowing that a system record is required at the customer end. The idea is to be prepared so that you don’t lose days in processing time in raising the invoice and after the invoice has become due.

Step #4 – Follow-up, Follow-up and Follow-up: Ok, so if you have done the three steps above, the invoice will most likely be raised on time and  now comes the painful part which involves customer relationship management and possibly a little bit of tact and diplomacy (collections-speak for not being a pain in the you-know-what) and lots of perseverance. If you know who the person is, in the customer organization, who is responsible for the processing of your invoice, I have found it helps to touch base twice before the invoice becomes due so that you are paid on time without the need for umpteen delays and follow ups internally and to the customer. Once, before the invoice is raised, call the customer contact and confirm the process requirements at the customer end so that you raise the right invoice in the right way. And then, a second time after you have raised the invoice and before it is due, confirm that the invoice has been received and it is cleared for processing. This helps eliminate surprises and the need for follow-up after the payment is due.

Step #5 – Continuous Improvement: Metrics, Dashboards, Regular reviews and Continuous Improvements go hand in hand – I am a great believer of this. You may know what to measure and how to improve the metric but unless you include the mechanisms to maintain a sustained focus, things just slip eventually. So, maintain a dashboard that can track all of the items above and the connected metrics (Accounts Receivable buckets, Unbilled revenue, etc.), map that against the DSO trend, set up regular reviews to discuss what is working and what is not, celebrate the wins and work on what part of the process needs improvement. Keep the extended teams informed on the changes and their impact and make them a part of the success too to demonstrate the importance of cash flow management to the overall business.

What have I missed? What processes do you follow to manage DSO? How important do you think this metric is? I would love to learn from you.

 *DSO: The most common calculation: (Ending Total receivables/Revenue (or Billing) for the Period Analyzed) X Number of Days in period

10 Comments:

    • coachrahul
    • April 23, 2012
    • Reply

    Very interesting way of tracking receivables. An ex boss of mine who owns a very large media group in india used to follow the same metric. 90 day was DSO was acceptable; anything below was good, anything above was… bad news!

      • Suchitra Mishra
      • April 24, 2012
      • Reply

      Hello Rahul,

      Thanks for dropping by. Yes, DSO gives a quick picture on how tightly operations is run in a company. Of course, you also have to look closely at the other related metrics too (like unbilled, deferred revenue and AR buckets) as like any other metric, DSO can also be manipulated to look good.
      Your old boss was not so strict, the acceptable standard for a DSO number is around 10-15 days above the average payment terms with customers – so if you have a 30 day term, DSOs above 45 days is not good.
      Regards,
      Suchitra

    • Joel Don
    • April 24, 2012
    • Reply

    I enjoyed the post. You may want to also consider (or write about) the “environmental” elements that can potentially disrupt operational initiatives, especially when the business climate turns south. Under such conditions, systems and schedules may be impacted when a customer arbitrarily changes Net terms from 30 to 90+ days (regardless of standing agreements). Or the finance department may be instructed to engage in “creative accounting,” delaying payables to improve the cosmetics of a balance sheet. Checking in with your customer report or accounts payable contact in advance of an invoice due date is a good strategy as long as this level of accounting vigilance doesn’t result in pushback. The best laid plans may need flexibility, especially if a favor or two is needed when you are experiencing a cash flow crunch. Perhaps structured practices need to accommodate the grey areas in business processes, which can sometimes be governed by the nuances of human intervention.

      • Suchitra Mishra
      • April 24, 2012
      • Reply

      Hello Joel,

      Very valid point. I believe that it is especially when things are going south or not giving the results that were planned or expected is when operational initiatives matter the most. When businesses are getting the results they expect, that is the time to have the operational initiatives launched and tested – so that when things start going south, you do not need to scramble internally but instead can focus your energies outwards – to the customer and market – to devise strategies to beat the odds. The operational processes remain the same whether business is good or bad, however you can set metrics (for measurement) that are more in line with the reality.
      Food for thought, indeed for another post – thank you and thanks for dropping by, Joel.

      Regards,
      Suchita

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