AFP’s latest Payments Guide, underwritten by MUFG, looks at how customer payment habits can influence days sales outstanding (DSO). Third-party solutions can greatly reduce DSO, but the customer and the vendor need to be on the same page.

KNOW YOUR CUSTOMER

In the age of automation, sometimes fundamentals such as knowing one’s customer can be overlooked.

“When people come and tell you they can reduce your company’s DSO, you have to recognize how much of that DSO actually relates to the payment habits of your customers,” said Matthew Johnson, treasurer at Nashville-based Genesco Inc., a retailer and wholesaler of branded and licensed footwear. “If I’m not getting paid for invoices because there’s a pricing discrepancy, then I need to know that.”

For example, a customer may issue a purchase order for shipments to multiple distribution centers, and their payment-terms clock starts clicking the day the goods are entered into the last distribution center’s system. The invoices may all be sent out on the first of the month, but some shipments may not be received for a week or 10 days or longer.

Third-party solutions to reduce DSO often apply technology to what essentially is a people issue. “My challenge to them is to show me how they’re going to make that customer start the term-clock ticking closer to the invoice date,” Johnson said.

The issue is especially acute for companies who have relatively few customers making up a large percentage of their AR base. “If I can’t get that customer to receive the product faster, you can’t change my DSO for love or money,” Johnson added.

Inaccurate billing can be especially problematic in certain industries. A provider of behavioral health services that operates a network of hundreds of facilities, receives payments from a variety of sources. Most come from Medicare, Medicaid and commercial insurers, explained the company’s director of treasury.

The executive noted that the government agencies “are never quick to do anything” and present a constant challenge for the company’s business office. On the commercial side, inaccurate billing, perhaps stemming from incorrect coding for services, results in bills getting “kicked back by the insurance company, and that’s at least a six-week period to get paid—quite a struggle.”

CREDIT CHECKS NOW SAVE DSO LATER

Another key element of knowing one’s customer is their creditworthiness. Credit checks when onboarding new customers enable companies to start the process of segmenting customers according to behavior patterns. In turn, noted Todd Glassmaker, director at The Hackett Group, companies can more accurately grant terms and credit limits.

“That’s going to cascade downstream into how well those receivables will be maintained, based on how risky that customer is and how well the business understands the risk of that customer,” he said.

Third parties have stepped up to largely automate that process, starting with facilitating credit approval for new customers, as well as enabling companies to monitor their customers’ credit status, typically using third-party data and sophisticated proprietary software. The long list of vendors providing those services includes Cforia, Billtrust and Esker.

This article is excerpted from AFP’s latest Payments Guide, Managing AR and Reducing DSO, available here.