By Patrick Hogan, Handle.com

In construction, finance and credit managers know how crucial it is to keep a pulse on their DSO. Daily Sales Outstanding or DSO is a critical metric that provides a snapshot of how long it takes to collect on credit sale invoices. A higher DSO means significant work needs to be done to get invoices paid faster. A low DSO can indicate a healthy clientele that pays on time but can also indicate conservative selling and the prospect of extending more generous credit terms to increase sales.

DSO is typically measured regularly – monthly, quarterly, and annually. The DSO for a definite period is calculated using this simple formula:

Accounts Receivable balance/Credit sales x Number of days in the period = DSO

• Accounts receivable balance is the total dollar amount of outstanding invoices, including overdue accounts
• Credit sales is the total dollar amount of unpaid sales

For example, the DSO for a particular month for a company with $40 million in collectible invoices at the time of computation and $20 million in credit sales for the entire month is 60 days.

Lowering DSO is always a goal for many credit departments in construction businesses. Industry-wide DSOs in construction are reported to be around 60 days on average compared to 45 days for various business sectors in the United States. 

In an industry rife with payment issues and where most sales are on credit, getting invoices paid faster is ideal. 

Strategies to lower DSO 

Improve customer experience

Getting invoices paid faster requires a multi-pronged approach. One primary strategy you must consider is improving the overall customer experience around payments. Delivering a great experience to customers doesn’t end with product and services. For payments, there are several ways to ensure that the process is as seamless as possible for customers.

Providing preferred payment methods

Ensure that you know what payment methods your customers prefer. In the past, most construction transactions were made through cash, checks, or wire transfers. These days, more and more buyers prefer to pay via digital channels. They may also want to have a way to pay directly from the electronic invoices you send. Credit cards remain popular, and there are many ways to integrate credit card payments with digital invoicing and billing.

Regular billing and invoicing

To stay top of mind of your customers’ accounts payable teams, it’s best to ensure regular invoicing and billing. This allows your customer to make timely payments and not have invoices stacked together for each payment cycle. Disputes and discrepancies can also be discovered earlier when invoices are sent regularly.

Itemized invoices and statement

Ensure that your invoices have all the information customers might need to process payments. Some customers will have their own A/P software that will require specific data to process payments–it’s best if your team finds out about these details early on. Inquiring about their invoicing preferences at the beginning of the customer relationship is a best practice. 

Incentivize early payments

In construction, late payments are almost the norm. Most customers are used to getting slapped with late payment penalties, and some may have even incorporated these fees into their internal budgets to hold on to cash for longer. However, late payment penalties carry a negative signal for customers. Incentives have the same function but are seen as a positive signal. Late payments cost money, and it’s better if you’re able to get paid earlier and avoid the added work of chasing invoices while also giving customers a great experience. 

Strengthen your credit approval process

Vetting new customers and prospects

Lowering DSO is not all about chasing payments–it begins with ensuring that your clients are of good financial standing and can pay. Vetting new customers and prospects, especially for larger projects on credit, can save you a lot of resources–in time, personnel, and money–in the longer run. Looking into credit records and if they have liens on the projects they’ve worked on can help you paint a complete picture of prospects’ and customers’ financial positions. For bigger projects, it’s not unusual to request a copy of financial reports that can prove they are creditworthy.

Regularly updating credit files for all customers

Financial positions for businesses change, so credit reviews for your customers must be done regularly and not only once at the beginning of the relationship. If their situation has changed, you can adjust accordingly per your internal credit policy. This allows you not to overextend credit and strategize around how to keep payments updated. 

Following credit policy

Your credit policy should be the chief guide in navigating collections for credit sales. Ensure that your sales teams are adhering to the credit limits set for customers based on the criteria on your policy. Ensure that the collections process is being followed. For any overrides and special cases, it’s best to keep everyone on the same page and update your credit policy if needed. Ultimately, your credit policy is your primary tool for minimizing credit risk and promoting timely payments for a lower DSO. 

Completing credit applications for all customers

In order to apply your credit policy well, getting as much needed information as possible is vital. Credit applications at the beginning of client relationships are paramount to ensuring that you have the records to reference as you make credit and collections decisions related to a customer. Handshake deals are not unusual in construction. However, that doesn’t mean that you have to skip over protocol, which can cost you significantly, especially as contract sizes increase. 

Firing customers

Sometimes, the relationship between you and your client is just not working out. Their capacity to pay or internal payment protocols are costing you resources. There, of course, is a sting whenever you end a relationship with a customer, but in the end, it’s business. Making difficult decisions for the company’s best is what will pay off in the longer run. 

Protecting your payment rights

Payments have always been a sore point in construction, and as a response, specific laws were created to protect all parties in a construction project in case of payment issues. 

Mechanics liens are one of the best tools in your payment arsenal that could come in handy if you need to recover payments from non-paying customers. They also help promote timely payments as customers are well aware of the risks of non-payment. 

However, mechanics liens come with responsibilities. There are preliminary notices that you must serve for many states to ensure that you preserve your lien rights. In many cases, failure to serve a preliminary notice or serving an inaccurate one can invalidate your lien, and you only find out when it’s time to enforce that lien. Using lien services that ensure the accuracy of the information included in preliminary notices and that notices are delivered on time and in line with delivery methods required by law is a great way to protect your rights and save time and money.

Lowering DSO is a company-wide effort that credit departments can spearhead. By promoting smart business practices in your company, you can get invoices paid faster while keeping customers happy.

About the Author: 

Patrick Hogan is the CEO of Handle.com, where they build software that helps contractors, subcontractors, and material suppliers with late payments. Handle.com also provides funding for construction businesses in the form of invoice factoring, material supply trade credit, and mechanics lien purchasing.