Balancing DSO & DPOIn our September (2017) Blog, entitled 7 Ways to Get Paid Faster, I outlined seven things small and medium-sized businesses could do to speed up invoice payments from their customers. But getting paid faster is only half of the cash flow balancing act. In addition to getting paid faster, you also need to hold on to your cash for as long as possible. Both Days Sales Outstanding (DSO – how many days it takes to collect on sales after they’ve been made) and Days Payables Outstanding (DPO – how many days it takes to pay your accounts payable) play important roles in managing cash flow, and often, in determining the success, growth and survival of a company. In a perfect world, you want to get paid by your customers before you have to pay your suppliers.
Preserving Your CashUnfortunately, most small businesses do not operate in the perfect world so while you are waiting to get paid, it is critical to preserve cash. The following are 7 Ways to Hold onto Your Cash.
- Take a look at your suppliers’ payment terms. Are they competitive? Can you negotiate longer payment terms? If not, shop around and find other suppliers who will offer payment terms. It may be worth paying a little more to secure longer payment terms.
- Pay smaller suppliers by credit card and take advantage of an additional 30 days to pay. Make sure to pay off your credit card within the month. You don’t want to make cash even tighter by incurring high interest charges.
- Pay bills on the last day possible, without going over. You do not want to jeopardize relationships, especially with critical suppliers.
- Identify critical and non-critical suppliers. When needed, stretch payments to your one-off and small suppliers to manage cash flow. Do not be overdue on any payables that report to credit bureaus. You do not want to jeopardize your company’s credit rating.
- Review your inventory and identify items that do not turn over quickly and tie up capital. Reduce or eliminate them from your inventory.
- Improve your supply chain efficiencies. Develop good relationships with your suppliers and take advantage of just in time inventory practices, where your inventory arrives only as you need it.
- Close the sales cycle. Make it a company-wide priority to close sales faster, deliver faster and invoice faster.