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Reducing Days Sales Outstanding (DSO) increases profitability

from  May 17, 2023 | 3 min read

What is DSO?

The finance metric Days Sales Outstanding (DSO) is an important indicator for professional services organizations (PSOs). DSO measures how long it takes for your business to collect payment from a client after a service is provided, giving valuable insight into the organization’s financial health and client satisfaction.

DSO is one of the most critical KPIs for financial executives because it measures how long it takes to collect receivables from clients. The number is calculated by dividing the number of receivables by the total sales multiplied by the number of days in a period. A high DSO indicates that a company is taking longer to collect its receivables, therefore holding debts on its books, which negatively affects cash flow. Finance teams must make sure they are using accurate time and expense reporting tools and that their finance executives understand how to interpret this metric correctly to ensure optimal performance; after all, if time and expense are not accurately tracked, there are likely to be errors in invoices later which can lead to slow payments and an increase in DSO. A low DSO indicates that invoices are produced quickly, expenses are tracked accurately, and payments are collected faster, resulting in a higher and freer cash flow and increased profitability.

DSO should be monitored regularly by finance teams to identify areas where adjustments can be made to improve collection times and reduce days outstanding. Some PSOs do not include invoices that have to be redone due to inaccuracies or client rejections in their DSO calculation, but they should. According to SPI, the percentage of invoices redone grew by over 10% in 2022, and DSO went up to 46.8 days from 43.5 in 2021. Ultimately, if expectations are properly set and time and expense are accurately reported, ideally, no invoice should be rejected, and DSO will be lowered. 

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What are the benefits of DSO for professional services organizations?

DSO has a significant influence on a PSO’s financial well-being. By collecting payments promptly, finance teams can maintain accurate financial records and provide reliable reports. This helps eliminate errors and allows finance leaders to identify areas where improvements are necessary. With timely payments coming in more regularly, finance teams are better able to budget for resources accordingly. By focusing their attention on reducing their DSO through resolving invoicing issues and streamlining time and expense processes, finance teams can more effectively manage their working capital. This can result in a more sustainable balance sheet and allows accurate forecasting of cash needs in the near term with better-informed decision-making. Finally, reducing DSO can also lead to improved client relationships, as payments can be made more quickly, resulting in less friction between the two parties.

How can PSOs ensure accurate time and expense reporting?

Time and expense reporting is critical as it allows teams to accurately track their utilization and efficiency and avoid revenue leakage. However, ensuring accurate time and expense reporting can be difficult without the right tools and technology.

1) Define your process

Define what data needs to be collected, how it is collected, and how it is reported. This ensures that everyone is working from the same playbook and that data is consistent across all departments. Utilizing an automated solution, such as Unit4’s Time and Expense Management and Professional Services Automation (PSA) software, can help ensure accuracy by automating routine tasks. This type of software captures real-time data from all channels, so PSOs can have an accurate view at every stage of their project. Automated software also reduces human error, as manual data entry can be prone to inaccuracies.

2) Train your team

Training teams to accurately report on time and expenses is key. Unit4 solutions are simple, automated, and designed for the needs of PSOs. We also offer an extensive training program. When people know how to use the technology correctly, accurate time and expense reporting can be maintained. With the right training, employees learn the importance of proper record-keeping and how it impacts the business. And with a thorough understanding of the system, they can gain insight into the entire process, allowing them to recognize when errors or omissions occur and address them quickly.

3) Utilize software

Utilize software solutions to make sure time and expense reporting is accurate. These tech solutions offer a wide range of benefits, from simplifying the data entry process to streamlining how quickly leaders can review, edit, and approve submitted timesheets. Having the ability to export data into different formats can be invaluable when you need to produce accurate time and expense reports that comply with corporate policies or governmental regulations. Automated reminders can also be sent to employees, enabling them to stay on top of their timesheets. Additionally, many systems can easily be integrated with other business applications, such as customer relationship management (CRM) or accounting tools. All these features combined can help an organization achieve better accuracy in its time and expense and resource tracking.

Change orders

Change orders must be managed appropriately. Too many change orders not only impact the budget and schedule but are signs of scope creep, inadequate executive sponsorship, poor communication, and unapproved change orders delay the invoicing process, increasing DSO. Finance executives should review financial patterns related to the increase or decrease in change orders to gain insight into underlying issues causing the variation. This can help them better understand what areas need improvement within the organization or if external factors may need to be addressed, such as with a client or supplier relationship. Additionally, finance executives should ensure proper visibility into any additional changes in scope or assumptions that may have been made during project execution to ensure accurate reporting of costs at all times.

Tips for reducing DSO

  • Make sure that finance teams have access to timely and accurate data. The faster that time and expense reporting is completed, the faster the finance team will have an accurate picture of overall organizational financials.
  • Finance executives should also be aware of when invoices are sent out and how quickly customers pay their invoices to identify potential bottlenecks.
  • Utilizing automation tools such as cloud-based ERP or PSA can help streamline manual processes such as timesheets, leading to fewer errors and more accurate reporting.
  • Implementing better visibility into finance operations can provide invaluable insight into a company’s financial position and help to reduce DSO.

How Unit4 can help your organization

Unit4 has several integrated financial modules that can help streamline processes for finance and project teams. These modules include time and expense reporting, accounting, budgeting, cash management, accounts receivable, accounts payable, general ledger, as well as financial analytics. With these features, finance executives have greater control over their financial operations.

With Unit4's automated data entry systems, finance teams can quickly generate accurate reporting of DSO to optimize their cash flow management. They can develop more effective payment plans to further improve their cash flow situation. And with sophisticated analytics capabilities, finance teams can gain better insights into their customer’s payment trends to maximize profitability.

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