Working capital is a priority for most businesses. It provides the security for your company to keep operating on a day-to-day basis, knowing that you have enough cash and liquidity to meet your financial obligations for the next 12 months. One of the key factors in making sure you have sufficient working capital is creating an effective Days Sales Outstanding (DSO) process.
DSO is the average number of days between when a company completes a sale and when it collects payment for the sale. The higher your DSO figure, the less cash flow and liquidity you have. So finding the optimum DSO number should be a priority for all businesses.
Companies of all sizes and sectors can suffer from late payments and a high DSO figure, potentially affecting cash flow, financial security and supplier relationships.
Graydon and Credit Expo recently conducted a survey of 5,750 companies in the Netherlands, looking into the relationship between Sales and Finance departments. The results were highly telling. Sixty percent of credit managers felt that the issue of timely payment wasn’t given enough importance in client discussions.
Creating more alignment between Sales and Finance departments can be a key part of reducing DSO. As the Sales team builds and maintains relationships with clients, they can help the Finance department by establishing clear payment terms with the client upfront. Of course, this can be a tricky conversation, but it’s an important one – as bad debt can be far more detrimental.
Hans Peter Vloemans, Sales Manager at Graydon, highlights why Sales representatives can benefit from discussing payment terms in client meetings:
“This conversation can give commercial employees ammunition to use if any problems arise later. For example, if a salesperson has agreed with a client that the client will receive a discount if it pays within two or seven days, and the client doesn’t keep to the payment agreement, the salesperson can remind the client, in a friendly but firm manner, that it risks losing its discount.”
Determining the financial risks of doing business with a client can have a significant impact on a company’s profitability. Which is why all companies should make communication between Sales and Finance a matter of importance. In doing so, each team will have a better understanding of the other’s priorities, particularly why client quality is more critical than quantity, and the detrimental effect of late payment, doubtful debt and bad debt on the business.
Indeed, insight from the Finance team should be used when selecting clients, and cooperation between the two departments should be robust and ongoing. Not only will this protect the company from working with clients with a bad payment culture, it will reduce the time and resources spent initiating relationships with companies that turn out not to be creditworthy.
One way to increase understanding between Sales and Finance is to deliver commercial training to Credit Managers. Understanding the commercial implications of a client relationship, rather than viewing clients as debtors, can be an important transition for Finance teams and create a middle ground with Sales.
Similarly, Sales teams can benefit just as much from Finance’s involvement, as Vloemans explains:
“Credit Managers can have an advisory role and adjust the rules of play in the interests of the entire company. For example, if a client’s cash is low, Finance can advise Sales to work with part deliveries or with just-in-time delivery, so that the client can spread its payments. Or if a client only pays after 90 days on average, the Credit Manager can advise Sales to communicate a price that is a few percentage points higher than normal, in order to offset the losses through late payment.’
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