With your working capital tied up in receivables and inventory, your customers’ expectations changing, and the cost of capital going up, how long can you really afford to wait for your cash? By reducing your DSO and getting money in hand faster you enable better margins and make it easier to afford the daily operations of the business.
We used to spend our lives waiting. Needed to go somewhere? You waited for a taxi or bus. Needed cash? Waited in line at the bank. Needed to buy something? Waited in line at a shop. Went out for dinner? Waited for a table. Wanted to watch a movie? Waited in line at the ticket booth, then at the concession stand, then waited for the movie to start. Now, with the likes of Uber, Venmo, Amazon, Grubhub, and Netflix, we never have to wait for anything. Yet, if you work in the receivables department of a wholesale distributor, waiting isn’t only the norm, it’s the name of the game.
With your working capital tied up in receivables and inventory, your customers’ expectations changing, and the cost of capital going up, how long can you really afford to wait?
Understanding Your DSO
What is your Days Sales Outstanding (DSO)? Is it going up or down? How much higher is it than your standard payment terms? 10 days? 20? 30?! If you don’t immediately know the answer to these questions, there’s an issue.
DSO - the average number of days that it takes your company to collect payment after a sale has been made – is an essential metric to help track your organization’s financial health. It is an aggregate view of how much of your company’s money is tied up in receivables and of how long it is taking to collect money from customers. Allowing your DSO to climb could represent fundamental problems. Are your customers using you as a means to finance their business? Are certain customers at risk of defaulting on their outstanding balances? To understand how long your company can truly wait for payment, you must first understand what impacts your DSO and in which direction it’s moving.
How Do You Compare?
Many companies offer standard payment terms of Net 30, yet industry average DSOs within wholesale distribution are higher: 48 days for transportation and logistics and almost 65 days for industrial distribution, according to FY2018 MorningStar figures.
When reading those numbers, you’ll have one of 2 thoughts:
- “I’m not doing great, but at least nobody else is either.” Or,
- “Why are we accepting +18 or +35 days, on average, in late payments? How much is this costing us?”
For a company with $1 Billion in annual revenue, it would not be uncommon to see a single day of DSO costing more than $200K. For the average transportation and logistics organization, that +18 days would then represent a $3.6 Million cost. That cost would jump up to $7 Million for the average industrial distributor.
Just because you’re on par with the industry doesn’t mean you’re in a good position. These high industry DSOs are indicative of a very large, very costly problem.
You Can’t Afford It, In The Long Run
If you didn’t already, I hope by now you understand that it is costing you a lot of money to essentially finance your customers’ businesses. Regardless of that isolated cost figure though, the question is: can you afford it?
Here are 3 things to consider:
- The Amazon Effect Today’s wholesale distributors are competing against Amazon, a behemoth company that can service your customers at less cost than you can. You need to find ways to compete so achieving cost efficiencies is imperative.
- Cost of Capital The cost of money is on the rise which will make the cost of holding receivables even more expensive moving forward.
- Low Margins Wholesale distribution is already a relatively low margin business which means there is little room for inefficiencies.
If you can afford the cost of late payments today, unless something drastically changes, odds are you won’t be able to afford it in the long run. What should you do?
You can implement a solution that automates many of the tedious tasks in your AR workflow while at the same time, providing your customers with an online payment portal that is proven to increase the speed of payment. The great thing about streamlining your receivables is that, compared to all the other alternative ways to drive efficiency, it is one of the easiest and fastest ways to realize true gains.
By reducing your DSO and getting money in hand faster you enable better margins and make it easier to afford the daily operations of the business. As a bonus, with your cashflow freed up, you can deploy it in better ways, whether that’s funding expansion, offering more product lines, or investing in better technology to run the business.
What are you waiting for?