According to recent research by Ardent Partners, today’s business leaders believe that two of AP’s biggest challenges are payments taking too long and late supplier payments. Both of these impact Days Sales Outstanding (DSO) and cause disruptions to the supply chain.
By digitizing AP processes, businesses can eliminate errors, speed up invoice processing, gain cash flow visibility and reduce payment collection times.
In this article, we’ll take a look at why reducing DSO is important for supply chain management, and discover how AP automation can dramatically shorten Days Sales Outstanding periods.
Why is reducing DSO important to the supply chain?
Days Sales Outstanding (DSO) is a key performance indicator that measures the average number of days it takes for a company to collect payment after a sale is made. The metric holds particular significance in maintaining a healthy supply chain because it supports efficient cash flow management and improved buyer-supplier relationships.
Research by QuickBooks found mid-sized businesses in the US were owed on average $304,066 by late-paying customers, and are spending on average 14 hours per week following up on overdue invoices.
Here are a few examples of how reducing DSO can positively impact the supply chain:
- Better cash flow management: By minimizing DSO, a business can accelerate the collection of outstanding receivables and ensure a steady influx of cash. Improved and more timely cash flow enables companies to meet financial obligations (including paying suppliers) and removes reliance on external financing.
- Optimizes working capital: The lifeblood of any supply chain is working capital. When a customer is late making payments, it ties up the company’s working capital in accounts receivable (AR). By reducing DSO, organizations can release trapped cash and improve their ability to invest in critical areas and enhance growth.
- Improved buyer/supplier relationships: Maintaining strong relationships with suppliers is vital to a healthy supply chain as they ensure a steady flow of goods and services. Reducing DSO improves a company’s ability to pay suppliers promptly, which can help them to negotiate more favorable terms, secure discounts, and build trust with key partners.
How to reduce DSO with efficient AP processes
Accounts Payable processes have a critical role to play when it comes to the performance and efficiency of the supply chain and reducing DSO. That’s because smooth and error-free AP operations foster strong buyer-supplier relationships and reduce the time it takes for invoices to be paid.
AP functions are responsible for processing invoices, as well as maintaining strong relationships with vendors. By automating invoice processing and approval workflows, companies can expedite payments, thereby shortening the time between sales and cash collection for suppliers.
In turn, businesses can improve cash flow and maintain a steady flow of goods and services for their customers.
Digitizing Accounts Payable (AP) processes and implementing electronic invoicing (e-invoicing) can have a transformative impact on the entire supply chain, by eliminating errors, saving time and driving efficiency. Using technology and automation, companies can streamline AP operations, reduce manual tasks, and enhance collaboration between buyers and suppliers to allow for shorter payment cycles.
6 ways AP automation reduces DSO
1. Streamlined invoice processing
Automating tasks such as data entry and invoice validation means that companies can process invoices more quickly, without the need for time-consuming manual processing. In turn, e-invoicing capabilities reduce the time it takes to generate and send invoices to customers, leading to faster payment collection and a reduction in DSO.
2. A reduction in errors
As well as being slow, manual invoice processing is also prone to errors, including typos, data entry mistakes or missing information. By embracing e-invoicing and AP automation, businesses can eliminate human errors by automatically capturing and validating invoice data against corresponding purchase orders or contracts. With accurate invoices, companies can avoid delays and a decrease in DSO by ensuring fast and accurate payments.
3. Invoice tracking improves visibility
AP automation tools can provide businesses with real-time invoice tracking, enabling them to follow invoices from submission right through to payment. With this enhanced visibility, businesses can better monitor outstanding invoices and improve the resolution of payment disputes, ultimately reducing DSO.
4. Automated notifications and alerts
By digitizing AP processes and introducing e-invoicing, systems can be configured to send automated prompts and notifications to customers about upcoming or overdue payments. These alerts act as gentle reminders for customers to make their payments on time, helping to reduce the risk of late payments and extending DSO.
5. Smoother supplier onboarding
AP automation systems often provide self-service portals or online registration forms that allow suppliers to easily enter their information and submit relevant documents. These portals streamline the supplier registration process, eliminating the need for manual paperwork and reducing time-consuming administrative burdens.
Additionally, these centralized portals enable efficient communication and collaboration, allowing suppliers and internal stakeholders to exchange information and resolve any queries or concerns swiftly.
6. Electronic payment options
Digitally transforming an AP function usually provides businesses with the option to integrate electronic payment options, such as electronic funds transfer (EFT) or virtual credit cards, which are much faster to process than paper checks.
Despite this, Ardent Partners’ research reveals that only 60% of B2B payments today are made electronically, which leaves significant room for improvement. The convenience and speed of electronic payments contribute to shorter DSO periods and stronger relationships with suppliers.
Embrace AP automation and lower DSO with Tungsten Network
Tungsten Network is a global leader in e-invoicing and can help you realize 100% invoice digitization while reducing DSO.
With our advanced electronic invoicing and accounts payable automation capabilities, Tungsten Network streamlines the entire invoicing and payment process, ensuring faster and more accurate transactions.
By eliminating manual tasks, minimizing errors, and providing real-time visibility into invoice status and payment schedules, Tungsten Network enables you to improve cash flow management, optimize working capital, and expedite the collection of outstanding receivables.