Does AR Automation Actually Impact Your DSO?

Motasim Zawawi

Dec 24, 2023


One of the most repeated questions we get from CEOs, CFOs, and Finance Managers is how exactly does automating your collection workflow impact your Days Sales Outstanding (DSO)? To an outsider, it may appear as a simple sequence of tasks, but the reality is that it's a complex orchestration of many steps, each with its nuances and challenges.

Let's start with the basics. DSO is the average time it takes for your customers to pay you. It's an important KPI for accounts receivable (AR) because it indicates your liquidity. A high DSO means the company is not getting paid quickly, leading to cash flow problems, such as higher write offs, larger owed debt, and decreasing working capital. A low DSO indicates that a company is efficiently collecting payments, boosting its cash intake.

Understanding the impact of automation on DSO requires an understanding of the day-to-day operations and how technology not only speeds up processes but also enhances accuracy and efficiency at every turn, fundamentally reshaping the DSO metric.

Manual AR collection workflow

Let’s visualize a simplified collection workflow for a typical B2B company

The collection team plays a pivotal role at each stage of the process. When the invoicing volume increases and adds to an already laborious workflow, the company starts experiencing more payment delays. In this blog, we will dive in to the different types of issues that could emerge and negatively impact your DSO.

Communication and Follow-Up Efficiency

Many B2B companies use common accounting software, such as Zoho or Odoo. Every month, they issue and send 100+ invoices using email, WhatsApp, SMS or a commonly used accounting software. To track reminders statuses and communication context, the finance team relies on a system of physical folders, spreadsheets, and email, cross-referencing them regularly. This method was not only inefficient but also lead to the following issues:

  • Forgetting to Send Reminders: In a manual system, it's easy to overlook sending payment reminders. This lapse can delay the payment process, directly impacting DSO.

  • Lost Context on Each Customer: Without a history of interactions, each follow-up can lack personalization and effectiveness, leading to delayed responses.

  • Not Knowing Date of Last Reminder: Without a system to track when the last reminder was sent, companies can either bombard customers with reminders or fail to follow up entirely. Both scenarios can strain customer relationships and affect payment timelines.

Risk Management and Prioritization

It is common to deal with many types of customers, ranging from small local businesses to large multinational corporations, each with different payment terms, personas, financial circumstances, invoices, and preferred communication channels. By applying the same collection practices to all customers, finance teams miss an opportunity to apply the optimal collection practices for each unique customer. Additionally, finance teams lack a data-driven approach to prioritize high-risk accounts and invoices, which is is essential for maintaining a healthy DSO and cash flow. As a result, the following issues arise:

  • Difficulty of Collaboration Between Teams: Ineffective collaboration between teams can lead to missed opportunities in identifying and managing high-risk accounts.

  • Lack of Notification or Escalation: Without automated alerts, overdue accounts may not receive the necessary attention, increasing the risk of delay.

  • Not Chasing Invoices with High Risk of Default: Neglecting to prioritize high-risk invoices can result in increased bad debts, adversely affecting the DSO.

Data Management and Accessibility

Traditional B2B companies manage their invoices and communication in silos across various systems and tools, such as email, WhatsApp, SMS, accounting software, and CRM. The lack of integration across these tools uncovers new problems that negatively impacts DSO, such as:

  • Not Updating Invoice Status: In a manual setup, invoice statuses can remain outdated, leading to confusion and inefficiency in follow-up efforts.

  • Confusion About Who's Owning Which Tasks: Without clear task allocation, there's a risk of duplicated efforts or overlooked invoices, contributing to a higher DSO.

  • Outdated Aging Reports: Relying on outdated information can skew the prioritization of collection efforts, causing delays in addressing critical accounts.

Automating the collection workflow addresses these challenges by ensuring consistent follow-ups, maintaining up-to-date records, and enabling effective prioritization and risk management. Companies that have adopted automation in their collection processes have seen a significant improvement in their DSO, leading to better liquidity and overall financial health.

What does the data say

Studies suggest that 62% of firms realize DSO improvement from AR automation, indicating that investments in automation leads to a reduction in DSO. Additionally, businesses that implemented specialized AR automation across over half of their processes have observed a 32% decrease in their Days Sales Outstanding (DSO), translating to a reduction of 19 days.

Here is a sample scenario to put this in perspective:

P.S If you’re interested to calculate your DSO, check out our free DSO online calculator.

Leveraging Levers for Improved DSO Management

Our platform, Levers, is crafted to blend effortlessly with your AR workflow, providing automation, analytical capabilities, and valuable insights to aid in effectively lowering your DSO.

For those aiming to advance their DSO management and streamline cash flow, Levers is here to lead the way. Contact us to explore how we can revolutionize your collection procedures.