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Reduced DSO by Digitizing Collection & Automatic Reconciliation

Simple yet Unthinkable: What Automation Can Do for Financial Metrics

Selling poses a dilemma in a business-to-business setting; on one hand, businesses need to boost revenue via sales and grow their market share to maximize profit. On the other hand, collection and fraud exist, jeopardizing cash flow and profitability. The risk is high in several industries with fewer sales frequency and tall ticket sizes, such as the construction and infrastructure industries. The risk can be diversified for some sectors with higher sales frequency and lower ticket size, such as fast-moving consumer goods and raw food materials.

A flour production and distribution company faced this dilemma. They diversify the risk of bad debt by setting credit limits for each buyer. The company owner solely does a visit to each of their buyer after repeating several sales cycles and assigns a credit limit based on his judgment. After that, the salesman can sell the flour with payment terms 7 - 14 days after the goods have been received and invoiced. By doing so to maximize revenue, they have to find as many buyers as possible to boost revenue.

For the owner, implementing terms of payment has a positive and negative impact on his business: On one hand, his cash flow will lean toward a more negative cash flow, and additional operational cost is required as a larger headcount is needed to do collection and more complex payment reconciliation. On the other hand, the payment term adds a competitive advantage compared to competitors. Problems arise when many buyers forget to pay on the due date. Buyers often don’t have the urgency to make payment if they don’t have to make the following order, which happens in both low and high seasons. In the low season, the sales cycle is slower. In the high season, buyers often overestimate the purchasing value. Both lead to less frequent orders and late payments.

The cost of implementing the term of payment

Payment reconciliation is getting more complicated. The flour supplier must match the payment and invoice issued 14 days ago. This complication is getting real where it has 2,000 buyers across the region, sometimes making partial payments. At a glance, the flour business now has to:

  • maintain and monitor the credit limit usage for each buyer

  • approve if sales above the credit limit are required. 

  • send an invoice after the goods have been received

  • remind the buyer to make payment before and on the due date

  • collecting payment and do payment reconciliation

  • adjust the credit limit of the buyer after payment is received

Not only in the operational layer, in term of financial the late payment from buyers have a significant impact. The cash flow runs negatively, and the finance team doesn’t know how to prioritize collection. The payment reconciliation slows and scattered, resulting in delayed Day Sales Outstanding (DSO) analytics. Not to mention the loss from fraud executed by buyers or sales due to using cash for payment. At the end of the period, the finance team found that the DSO was three times longer than predicted, at around 40 days, and the bad debt grew to 3.5% of the revenue. 

Centralized, Streamlined Information Flow, Accessible in Anywhere

The issue is minimized drastically using, where the invoicing process can be digitized and centralized. Thousands of invoices can be created at one time. automatically measures the credit limit for each buyer and blocks the invoice creation process if the limit is exceeded. Management and the owner can approve any sales above the credit limit. After that, invoices can be sent in real-time via email, WhatsApp, and SMS. The buyer will automatically receive invoice reminders before, on, and after the due date. Once the payment has been made, automatically matches and reconciles the payment and invoice, whether for partial or full payment. By doing this, the buyers’ credit limit will be refilled. Real-time notifications, including payment confirmations and invoice reminders, will also be sent to both the buyer and the supplier.

From the buyers' perspective, they are reminded, and all invoices are neatly listed to ease their operations. Multiple payment methods, including card payment, are provided to prolong their payment term further. Using digital payment instead of cash also gives them trust that their money will arrive at the correct destination without fraud.

After two months of change management, the company fully adopted digital invoicing & payment, resulting in less than ten days DSO in total and below half percent bad debt. This achievement can be done with a scalable finance team focusing on strategic improvement and collecting impactful bad debt as the operational and analytics have been automated by The sales team can also focus more on market expansion and building a more intense relationship with the buyer, resulting in a more timely payment for the business.

We believe that each business is unique, along with its complexity. That’s why we built our modular product, complemented by experienced business consultants who are ready to tailor our solution based on your primary needs. Learn more about how can streamline your procure-to-pay and order-to-cash process and book our time now.

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