IT'S A SECRET:...Hidden DSO
Shining Light on Your Full Order-to-Cash Process
Every day counts once an invoice is sent and added into the calculation of day sales outstanding (DSO). As a core metric of accounts receivable efficiency, companies work tirelessly to bring down DSO and improve cash flows.
The calculation, however, may be masking an internal problem in the order-to- cash process. Slow pre-billing procedures could delay the issuance of invoices, and while this period between service delivery and invoicing is outside of the DSO computation, it has a more denigrating impact on cash flow.
It acts as a hidden increase in DSO.
The main activities in this veiled period are data collection, preparation, follow-up, and invoice issuance. All along the logistics chain, various internal functions and outside vendors are involved. Consequently, it is often the work of the primary service provider to collect the charges into a single statement. It is in the pre-billing phase that time is usually wasted.
Three main reasons explain the lost time. First, poor process built upon historical precedent hinders data collection. The “this is how it’s been done” mentality thwarts the streamlining of processes and systems and stunts continuous improvement activities that can accelerate and automate invoice preparation.
Second, communication often breaks down between the front office and back office. Weaknesses in cross-departmental coordination are exacerbated when volumes are high, as they are currently. Moreover, the organizational structure premised on back vs. front office tends to neglect the recognition that “back office” colleagues issuing invoices are some of the most important customer- facing representatives of the company and critical to cash flow.
Finally, accountability for the pre-billing process is adrift, dropped somewhere between sales and accounting and regularly relegated to junior team members still learning the complexity of the logistics business. A KPI tracking pre-billing effectiveness either does not exist or is not tied to a department’s performance, an omission in measuring what matters.
On the bright side, best practices can right the ship and improve pre-billing productivity. They include devising a KPI to know the time from service delivery to invoice issuance, reorganizing the pre-billing function, integrating data systems, and leveraging experts in receivables management to challenge the conventional thinking of the organization.
Hidden DSO is a real problem, and the remedy can drive meaningful benefits to cash flow and improve the customer experience. Current metrics conceal the gap, and that is even more reason to assess and resolve any issues.
What are you doing to uncover hidden DSO? A smart first step is to reach out to the experts at Metro Group, who can lend their experience to expose it and elevate your results.