We’re starting the DSO improvement process with invoice structure. These tips are simple, easily implemented and achieve their goal; they help eliminate payment delays.

Most invoices I receive have the generic Terms of Sale written on them (e.g. “Net 30″).  “Net 30″ is open to interpretation.  Some customers may pay 30 days from the date of invoice, 30 days from the received date, or 30 days from the day entered into their accounting system. To eliminate any possible confusion, use bold lettering with the phrase “PAY BY” and provide the specific due-date.

It’s good practice to clearly list contact information on invoices. When your customer receives a problem invoice, their natural reaction is to clear up the problem immediately.  The probability of receiving communication from your customer increases if the convenience of contact information is included.  If not, there’s a high probability that your customer will delay calling or wait for your call.  In most instances, it will be after the due-date.  Provide a phone number with extension, email address and fax along with a contact name. Also, include language such as “Questions with this invoice, please contact us before the due-date”.

When requesting payments be mailed to a PO Box or an alternative address, list “REMIT TO” and the exact address clearly with white-space to reduce the likelihood of customer mistakes.  There can be serious mail delays if your customer uses your physical address zip code with a different PO Box address.

Writing your credit terms on the invoice will provide your customers with clear guidelines to follow.  The following is an example that you can tweak with your terms. “PAYMENT IN FULL IS DUE BY (DUE DATE).  IF PAYMENT IS NOT RECEIVED BY (DUE DATE), A FINACE CHARGE OF (INTEREST RATE) PER MONTH WILL BE ACCRUED ON UNPAID BALANCES.”

If possible, use color for the suggestions above.  Red ink will catch the eye of your customers.  This suggestion will give your invoices much more attention, believe it or not.

Try revamping your invoices.  Make sure that everything is clearly written, easily read and has plenty of white-space to separate sections.  Using the tips above should accelerate payment and reduce possible stall tactics.

Next, I’ll talk about using payment discounts to increase cash-flow.

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Business savvy accounts payable departments hold invoices as long as they can to earn interest income.  Most small businesses won’t pursue interest charges for many reasons.  The most prominent reason is they are scared to jeopardize their relationship.  Often, this fear minimizes profits and forces companies to borrow against a line of credit.

Companies that borrow against a line of credit bear the burden of paying interest to their lender.  Not only are these companies paying interest, they are losing out on the opportunity to gain interest or invest back into their company.  The combination of this actual expense and the lost potential gain can lead to a significant decline in profits.

To calculate the cost of carrying receivables over a year you must know your Days Sales Outstanding (DSO), interest rate and credit sales for the year.  The formula is:

 ((receivables x interest rate)/365) x Days Sales Outstanding

 Take the time to calculate your cost of carrying receivables and think of ways for lowering DSO to minimize this expense. 

 Days Sales Outstanding plays a major role in the accounts receivable carrying cost.  It is part of the equation that can be improved.  By lowering DSO, money is saved.

In the next post, I will offer simple steps to improve DSO. 

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