Sidetrade | The Hidden Metric: Why Starting the Clock Early on 'Days Sales Outstanding' is Critical...

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Sidetrade :The Hidden Metric: Why Starting the Clock Early on 'Days Sales Outstanding' is Critical for Your Business

Bryan Pederson, AVP Product, In Charge of E-invoicing,  SidetradeBryan Pederson, AVP Product, In Charge of E-invoicing, Sidetrade
Days Sales Outstanding (DSO) is a crucial financial ratio that measures a company's ability to collect payments for its products or services sold. But many CFOs in large businesses may be miscalculating DSO by starting the clock too late in evaluating this metric.

DSO calculation should begin well before an invoice is created: it should start as soon as the service was rendered, or the product was shipped. Without accurately determining the time-to-invoice (TTI), you are not truly assessing the health of an Order-to-Cash cycle.

As a financial leader, it's vital to ensure that your DSO measurement accurately reflects your company's financial health. This requires a comprehensive and precise approach to TTI measurement. By doing so, you can also optimize your invoicing and collections processes, reduce DSO and improve overall financial performance.

How a slow TTI is harming your cash

The fact is - the faster you get an invoice into your customer’s hands and accounts payable systems, the faster you’ll get paid.

But if your billing team is bogged down with manual processes and managing various customer requirements, multiple formats and multiple systems of record, you’re looking at a variety of bottlenecks. These include increased risk of errors, poor workflow visibility and lack of capacity to scale your teams – all which lead to delays in the invoicing process and a negative impact on your DSO.

Establish a TTI threshold to reduce DSO

By avoiding manual processes and accelerating TTI, you can expedite payments, create win-win scenarios for you and your customers and optimize the Order-to-Cash process. This will ultimately benefit your bottom line and secure your cash flow – all of which is crucial in our current economic climate.

For many industries, TTI can represent a significant hidden value. Sectors such as oil and gas, human resources, transportation and logistics deal frequently with field ticketing.
The associated timesheets require internal routing and customer pre-approval processes that can lead to delays of over 60 days before an invoice is even generated and sent to a customer.

Common roadblocks that businesses can easily avoid

While it’s clear that reducing DSO begins by improving TTI, there are several roadblocks that businesses must overcome to achieve this. CFOs who have evaluated their TTI have often encountered some (or all) of the following reasons for delays and roadblocks:
• Paper-driven or manual internal processes
• Lack of integration between internal and external systems that hold data required to present an invoice to the customer (e.g., CRM, ERP, Orders).
• Complex customer requirements - particularly with multiple or complex AP systems and processes
• Delays in purchase orders generated by the customer when procurement is involved late in the process
• Pre-invoice documents requiring approval, such as field tickets, timesheets or delivery tickets
• Additional internal stakeholders becoming involved in the approval process (e.g., internal invoice review for key clients before they are sent out)
• Lack of transparency into internal invoice statuses and task responsibility, workflow, alerts and notifications
• Delayed backup files being provided by other departments (e.g., drawings, tickets, photos, spreadsheets, etc.) – or by external stakeholders (e.g., proof-of-delivery documents from 3rd party logistic providers)

In unison, these roadblocks can create significant obstacles to achieving a healthy TTI and DSO – so it’s critical to address them proactively to optimize financial performance and maximize revenue.

Days Sales Outstanding (DSO) is a crucial financial ratio measuring a company's ability to collect payments for its products or services.

To reduce TTI, your invoicing platform should be able to easily integrate with systems that manage field tickets and product deliveries and timesheets etc. It should also provide pre-invoice checks and balances supported by auto-validation and a workflow engine, allowing billing clerks to complete and correct transactions.

By bringing forward the TTI and automating specific workflows, your team can focus on high-value-added tasks and remove roadblocks by asking the right questions. By bringing transparency to your processes through digitization, your organization can also reduce redundancies and improve internal processes.

Order-to-Cash solutions improve efficiency, accelerate cash flows, ensure full transparency surrounding TTI and optimize DSO.

Ultimately this makes efficient measurement of DSO a strong source of value for your business.
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