The amount of time it takes to get paid will vary by industry and on the payment terms that were agreed to in the credit agreement. If you switch from Net-30 to Net-15 you will obviously receive payment quicker. Yet, this is not always an option and in some cases will only cause more problems than it solves. One way to decrease your DSO without changing your credit terms though is to learn to schedule your invoices so they better align with your customer’s payment schedule.
What situations will this apply?
This method will not work for everyone. It will work best for those of your customers once a month on Net-30 terms (it will work with shorter terms but the benefit will be less as you will see). It also requires that your customer pays their invoices no more than one or two times a month on consistent dates (again, it will work if they pay more often but the benefit will again be less).
An example scenario
Let says company X bills their customer ~$1000 on the first of every month for all of the product that their customer purchased in the previous month. They then give their customer Net-30 terms to pay this invoice. Now their customer will get this invoice on the first of the month and know they have 30 days to pay it. Many businesses, because of the popularity of Net-30 terms, will pick a certain day (or 2 days) each month to settle all their current payables. Let’s say your customer does not have that many invoices to pay so they pick only one day a month to settle up on all their payables and this day happens to be the 25th of each month. In this scenario, you will still receive a payment within the Net-30 terms that were agreed upon but it will take nearly all of the agreed upon time to do so.
How scheduling invoices can help
In the above scenario, it takes you 25+ days to receive payment from your invoice. This is not bad, as it is still within the agreed upon terms, but obviously, the quicker you can receive payment the better. The first step in this strategy is to figure out when your customer pays their payables. This can either be accomplished by asking or by noticing a pattern in when they pay each month. Once you know this, all you need to do is reschedule when you send out your invoice so that it is 7-10 days before for this payment date. This way you still give your customer enough time to process and pay your invoice but you also cut down the time it takes to get paid by over 50%.
Obviously, the above example was the best case scenario and you may not see improvements to that degree. Sometimes though a week or even a few days can seriously help your cash flow situation.