G. Connie Runia, Attorney
Co-owner, On Behalf
By: G. Connie Runia, Guest Author
Your business depends on receiving payment for the goods and services you sell. But strong sales numbers do not necessarily translate into available cash. The issue is, when will the cash be available for use?
The amount of time between the date of the sale and the date the cash becomes available is the Days Sales Outstanding (DSO), an average measure of how long it takes for your customers to actually pay after invoice. To calculate DSO,
DSO = (Total owed by customers in period) / (Total sales in period) * (number days in period)
For example you have annually $120,000 unpaid on $780,000 in annual sales. About 15% of your sales are unpaid and your DSO is 56 days. Customers are taking, on average, 56 
days to pay. You are waiting for your cash and it comes down to this. If you do not have your own well-earned cash to use, you will be using someone else’s cash to fund operations. So what is the true cost of delayed payment?
The obvious answer is tied to the cost of alternate funding. Payroll, rent, supplies and other operational expenses do not stop to wait for customer payment. There is a cost to using another’s cash, whether banker, a private lender, personal resources, or delaying your own payables. It is this cost which drives the business goal to shrink DSO.
But there are significant hidden costs as well. These costs are easily overlooked, however, they may form the most expensive aspect of waiting for payment.
1. Discounted value. Lower chance of recovery and increased cost to recover as an account ages are legitimate reasons to discount the value of that account. Write-offs mean unrecovered costs and lost profit.
2. Administrative costs. The administrative burden of A/R recovery involves staff time, internal tracking systems, postage and phone expenses. These are generally not tracked separately and often lost in overall administrative expenses.
3. Planning and Predictability. With slow paying customers, you will need to plan for keeping a portion of your cash set aside just in case. You may or may not have to expend additional resources to recover payment and this cuts into profitability. The more predictable and shorter the DSO, the more resources you can instead direct toward revenue generation.
4. Lost Opportunity. When valuable company resources are being focused on dollars already earned, they are not focused on earning new dollars. What opportunities are being overlooked because of busy-ness, lack of cash and the other strains of managing A/R?
5. Employee Morale. It can be discouraging, frustrating and divisive when payment is slow. Finance pressures sales for shorter payment terms, sales people do not receive timely bonuses and no one wants to make the customer calls on slow paying accounts.
Are there opportunities for you to impact your DSO and receive payment faster? Yes! You can make a real Impact- on these costs and on cash flow. Your business depends on it. Make it a focus and priority.
G. Connie Runia is co-owner of On Behalf and an attorney licensed in Oregon and Idaho. Her practice includes advising on diverse corporate issues with experience in all stages of business development, and she recently served as general counsel to a local collection agency. On Behalf is an outsource A/R company based in Meridian, Idaho. On Behalf offers expertise in all stages of A/R management. Contact connie@on-be-half.com
