By Patrick Hogan, handle.com

The day sales outstanding, or DSO, is one of the most important key performance indices (KPIs) in the construction business. The DSO allows you to measure how fast you convert your invoices into cash — it helps you to not only assess the health of your cash flow but also to mitigate any potential financial risks.

The average DSO for the construction sector is between 60 to 90 days. Ideally, you want your DSO to be as low as possible since a low DSO implies that your clients pay their invoices early or on time.

If your DSO is high, it means that you often deal with late payments and overdue invoices. Below are seven tips to help you reduce your DSO and consequently protect and improve your cash flow.

1.       Vet your clients

Vetting your clients right from the beginning is necessary, especially in an industry like construction. You do not want to work with clients who have notorious track records for never paying on time. Not only will they cause you to increase your DSO, but they can also cripple your cash flow.

If you choose to work with ill-reputed clients, consider imposing a lower trade credit limit on them. This way, you ensure that your business is still protected in case the client fails to issue the payment on time.

2.       Implement a robust trade credit policy

When you have an effective trade credit policy, making decisions on which clients to work with becomes easier. For example, your credit policy may include requiring all potential clients to submit trade references as part of the application. You can consult the trade references before you make a decision.

However, keep in mind that every company is different. A robust trade credit policy for one contractor may not be effective for another. You must first know your company’s core values before you build or reassess your trade credit rules.

3.       Send invoices on time

Another key step to reducing your DSO is sending out your invoices on time. Your clients will not know how much they need to pay you without seeing an invoice. Note that if you consistently send your invoices late, you will also receive your payments late.

There are many ways to improve your invoice processes. One way is to set a regular date and time for when you prepare and send your invoices. You can also take advantage of automated invoicing software to become even more efficient.

4.       Serve preliminary notices, even when not required

Serving preliminary notices for every project has many benefits, one of which is increasing your so-called “visibility” in a project. For example, when you serve a preliminary notice on a property owner, they are more likely to remember who you are, which is a big advantage during payment time.

Serving preliminary notices also preserves your lien rights. However, even if the state you are in does not require pre-lien notices, you are still strongly encouraged to serve one so you can get paid on time and reduce your DSO.

5.       Be specific when writing your payment terms

Your client must easily understand the payment terms in the contract. You should clearly and concisely communicate to them when they will receive the invoice, how long they have before the payment deadline, and what the consequences are if they fail to make the payment on time.

Late payment penalties must be stated clearly in the payment terms. If your payment terms are vague, payment disputes may arise, which will only delay the payment process and increase your DSO.

6.       Offer early payment incentives

Other than imposing late payment fines, offering early payment incentives is also a good way to encourage clients to pay early. Early payment incentives appear less aggressive than late payment fines, and some clients may find it more appealing.

If you decide to offer early payment incentives, be sure to communicate them to the client. It should be stated in the payment terms in order for the clients to know that they can save some money if they choose to pay early.

7.       Organize your records

Maintaining and organizing your records is imperative if you want to reduce your DSO. When your records are neatly organized, you can easily identify which invoices are overdue and which clients are consistently pulling your DSO up. You can also measure our KPIs if you can easily access your client data.

All the tips mentioned may require additional effort and diligence on your end, but they are all worth doing, especially if you want to reduce your DSO and convert your invoices to cash faster. 

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