Making a sale, but never collecting the cash from that sale, is the fast track to a cash flow crisis.
Your role as CFO, or as the entrepreneur leading the company, includes being smart about turning those sales, your accounts receivable, into cash as quickly as possible.
Unlike a nice bottle of red wine, receivables don’t get better with age!
DSO as a Management Tool
I wrote an article for the Business Resource Center at The Business Bank of Texas this week that will help you turn your receivables into cash faster (and with less bad debt expense along the way).
I have seen many times in my career where a consistent focus on DSO (days of sales that are sitting, and oftentimes stuck, in accounts receivable) by the management team helps drive accounts receivable down and frees up much needed cash for a business.
It is certainly not the only tool you need to properly manage accounts receivable.
But DSO is an important high level tool for monitoring trends and the speed with which you turn your sales into cash.
A Real World Example
In the article, I share an example from my consulting work that highlights how valuable a visual representation of DSO can be.
The CEO owned a big part of a very successful software company.
He had a very clear picture about he was going to navigate the journey from $6 million in annual sales to $50 million. One part of that plan was bringing some smart, seasoned executives on to the Board of Directors.
He asked me to help create a monthly reporting package to provide the new Board.
He was recruiting some seasoned business executives and he wanted a professional and credible package to help them understand the business and monitor monthly progress against the plan.
The first step in my work was to shine a light on cash flow by looking at how well he and his staff had been managing their accounts receivable.
Here is the full article (the rest of the story! ) at The Business Bank of Texas.
Remember, making the sale to a customer is a win… not collecting the resulting accounts receivable is a ticket to the poor house.
Check out the full article so you can begin monitoring and managing your DSO every month.
It’s the ticket to higher profitability (less bad debt expense) and stronger cash flow.