2020 was the year of supplier shortages, drastic demand fluctuations, increased operating costs and liquidity pinches. No matter which end of the spectrum your business was on, supply chain leaders were forced to take a fresh look at their business model to ensure they can weather the next storm and come out on top. For many innovative leaders, this means new ways of thinking and capitalising on digital transformation to realise real results on their balance sheet.
After a year chock full of uncertainties, businesses are finding that the time in which they collect and make payments is having an even bigger impact on their ability to maintain a healthy cashflow. Luckily, there’s a way to speed up both collection and payment through a single, AI-driven platform.
DSO and DPO: What they are and why they matter.
Before diving in too deep, let’s lay some groundwork.
Days Sales Outstanding (DSO) is the measurement of how long it takes for a company to collect payment on an invoice. The “why it matters” part is pretty straightforward here: the better (or lower) your DSO, the faster your business is getting paid. A high DSO has a tremendous impact on cashflow and revenue and can prevent you from investing in your company’s growth. Reducing DSO, even slightly, can go a long way toward improving financial health.
When it comes to gauging “good” and “bad” DSO, the Credit Research Foundation’s National Summary of Domestic Trade Receivables found that the average DSO in Q2 of 2020 was 41.56 days. As a general benchmark, you can consider anything below 45 days to be a low DSO. Not sure if your DSO is competitive in your industry? Take a look at competitors — they’ll let you know if you’re falling short or not.
Days Payable Outstanding (DPO), on the flipside, is the efficiency ratio for how long it takes for a company to pay its suppliers. And like DSO, it can pack a major punch when it comes to cashflow performance. DPO can also be the determining factor between suppliers considering your company a “good client” or a “bad client”. There’s currently no benchmark for a “healthy” DPO due to the variability of industry, competitive positioning and bargaining power of organisations. That’s why keeping a close eye on your DPO and your competitors’ DPO is important for gauging your payables performance.
This is where you say, “Cool beans, now how exactly do I improve DSO and DPO?”
And that’s when I say, “Shhh, keep reading.”
The “secret sauce” for improving your DSO and DPO.
Let’s not overcomplicate it. Improving any process usually comes down to efficiency, and DSO and DPO are no different. By creating a faster, transparent and streamlined process for collecting payment on invoices and paying suppliers, DSO and DPO will automatically improve. Speaking of automatic …
There’s one thing that forward-thinking business and supply chain leaders have found to be monumental when it comes to all-around efficiency and cashflow performance, and that’s AI-driven automation.
You can’t improve DSO and DPO without optimising the core procure-to-pay (P2P) and order-to-cash (O2C) processes that determine them. These cycles are inextricably intertwined, therefore automating one and not the other can create departmental silos that can result in new inefficiencies, and can be an overall disservice to your ability to optimise working capital.
The secret sauce to a better DSO and DPO isn’t just automating P2P and O2C processes, but automating them through a single, integrated platform that simplifies and standardises your organisation’s finance function as a whole.
Digitally transforming P2P and O2C processes through a single platform leads to better DSO and DPO ratios by:
- Automating invoices, collections, payments and cash application to make it easy to be paid and pay others in a timely manner
- Eliminating the costs of resources once needed for manual P2P and O2C processes
- Providing end-to-end transparency across all workflows and cashflow activities via customisable dashboards
- Drastically reducing the risk associated with manual cashflow management
- Improving relationships with suppliers by ensuring timely payment and providing an online self-service portal that makes it easy to communicate, ask questions and access invoices
- Offering supply chain financing, which allows supplier to bolster their working capital by opting for faster payment in exchange for a discount of finance fee
- Best-in-class AI-driven data capture that continuously improves the more it’s used
- Providing a customer self-service portal that allows for easy communication and management of customer information, which ultimately leads to stronger customer relationships
These are just the tip of the iceberg when it comes to the benefits of automation. For more information and a deeper dive into financial transformation, check out this ebook!
The ideal DSO and DPO, is at any organisation’s discretion. Some want the DSO to be as short as possible while extending DPO as much as they can, so they can keep cash on hand for a longer period of time. Others chose to pay vendor invoices quickly to leverage discounts granted for early payers. However, one thing is for sure: to achieve the desired equilibrium and performance for your P2P and O2C value streams, you have to overcome silos in your finance organisation. You must encourage a cross-department team spirit and understand how the actions of one team will affect the other.
By managing both O2C and P2P on one platform, you’re able to instantly see everything from one view. Giving you a complete and real-time view of your financial health.
-Written by, Justin Cunningham