How Good Is Your Company at Getting Paid?

The Importance of Days Sales Outstanding and Its Impact on Your Accounts Receivable

Getting your customers to pay their balances in a timely manner can be a challenge in just about any industry, and pest control is no exception to the rule. In addition to being frustrating, outstanding balances can quickly add up and impact your cash flow.

Needless to say, minimizing the time you wait to get paid is crucial to running your business smoothly and efficiently. The first step is to track and analyze your accounts receivable to solidify your insight into how good your business is at getting paid, and it starts with days sales outstanding.

What is DSO?

Days sales outstanding, frequently shortened to DSO, is an accounting metric that measures the average number of days a business takes to receive payment on their invoices. The lower the DSO, the faster payments are collected; the higher the DSO, the longer it takes the company to get paid.

DSO is a valuable metric and can be an important indicator of a company’s financial well-being. As such, financial experts advise businesses to track their DSO each month.

Why is DSO important?

In order to support healthy cash flow, pest control businesses need to ensure that they’re being paid in a reasonable timeframe. When customers pay on time, companies are able to access the working capital they need to run their business operations. Additionally, on-time payments make it easier for businesses to predict and anticipate future cash flow, allowing them to better plan ahead.

On the other hand, a higher DSO indicates customers aren’t paying on time as consistently. This typically leads to a business running short on cash if not managed appropriately.

What is a good DSO score?

Forty-five days or less is considered a good range for DSO. While the lower the DSO, the better, this rule of thumb can prove useful as a guideline when diving into your numbers.

Of course, it’s important to remember that there’s no true one-size-fits-all definition of what’s good or bad when it comes to DSO. When defining an acceptable range for a particular business, it’s important to consider:

• Ongoing industry trends
• Net terms
• Frequency of invoicing — daily, weekly, monthly?
• Fluctuations due to seasonality
• Prepay and autopay payments

Tracking your DSO

Before you can set out to improve your DSO, it’s important to start with a baseline. Start by calculating your DSO for the past few months to get a gauge for where your business stands.

To calculate your business’s DSO, use this formula:

(Average AR in time period / Credit sales made in time period) x Number of days in time period

Example: Your company’s average AR for April 2024 is $125,000; in that same time period, you had $100,000 in net credit sales; there are 30 days in the month. With this info, the formula would look like this:
(125,000/100,000) x 30 = 37.5 days

DSO can be used as an indicator of efficient — or not so efficient — AR and collections processes, customer satisfaction and other potential issues. Failure to collect money owed can lower a business’s liquidity and hurt its ability to grow since funds are tied up in accounts receivable. Once you’ve calculated your DSO, you’ll have a baseline you can use to gauge future performance and start working toward a stronger number.

Improving your company’s DSO

To have an impact on your DSO, start by revisiting the way you approach billing your customers. Start by looking at the way you currently handle the billing process and look for areas where you can improve your processes. Ask questions like:

• Are you releasing invoices in regularly scheduled batches?
• Are you automating the processing of recurring payments?
• How are you handling prepayments and renewals?
• Do you provide payment plans or customer financing?
• Are the terms on customer accounts accurate and up-to-date?

Next, examine the journey from sale to payment from your customer’s perspective. In addition to stating your pest control company’s payment terms clearly when signing a new customer, it’s important that they’re also clearly displayed in customer agreements and invoices.

Be sure that all of your staff — including both office employees and technicians — is trained on payment expectations and how to communicate that information to customers. If this information isn’t clearly stated and included in documentation, it’s possible that your customers may be late on payments without even recognizing it.

Make payments easier

Once you’ve reviewed your billing processes, it’s time to revisit your collections processes and reevaluate your approach. Collections is a great opportunity to ensure your company is easy for customers to do business with; the easier it is to make a payment, the more likely your customers are to pay on time.

Start by considering how many ways you allow customers to pay. For instance, accepting credit card payments is crucial for pest control businesses; 85% of customers prefer to pay for field services with a credit card. The more payment methods you support, the easier it is for your customers to pay their invoices.

Easy access to make payments is also crucial. Providing customers with access to an online portal enables them to make payments whenever it’s convenient for them without the need for a support representative. Similarly, including ePay links on invoices, inspection reports, and statement emails makes it easier for customers to make payments while the bill is fresh in their minds.

Take advantage of automation

A great tool for streamlining the collection of accounts receivable is automation. When implemented in the payments process, automation can ultimately make the process faster and more convenient for both your customers and your business.

By securely storing customer payment data on file and allowing them to enroll in autopay, you have the potential to eliminate missed and late payments on those accounts. This not only lowers your DSO but also improves the customer experience by removing the need for them to pay you manually. This scenario also means you don’t have to chase down their payments — a process neither businesses nor customers look forward to.

When storing card data on file, be sure to account for expired and outdated payment information that can lead to unintentional customer churn. For PestPac uses, the Account Updater feature can automatically gather updated info when a card is approaching expiration, reducing involuntary churn by 11% — a significant figure, considering increasing customer retention by 5% increases profits by upwards of 25%.

In addition to accepting a wide range of payment methods, consider providing your customers with an option to finance more costly services. While accepting partial payments may allow you to collect some of a balance as opposed to none of it, a dedicated option like WorkWave Pay Over Time allows you to define a repayment schedule for your customers while receiving payment in full for your business when the service is complete.

Meet collections head-on

While reexamining your billing processes and customer payment options can drastically improve your DSO and keep your cash flowing, some balances are bound to linger despite your best efforts. Having an established collections process can help your business to close out those balances more efficiently and keep your DSO low. A few questions to ask when evaluating your collections process include:

• How are you following up beyond leaving an invoice/inspection report at the conclusion of the service?
• Are you sending a post-service email?
• Do you send statements sporadically or on a set cadence?

Establishing a cadence for collections communications can keep outstanding invoices from slipping through the cracks. Start by sending a post-service email that includes an ePay link to make payment as easy as possible. After a predefined amount of time that aligns with your terms of service, send a follow-up email. 

While reminder notifications and automated emails allow you to streamline the process, some delinquent accounts may necessitate sending physical letters or making direct phone calls. Schedules for these communications should be standardized in accordance with your business’s terms, as well, enabling you to evaluate your processes and adjust them over time based on the impact on your DSO.

By examining your existing payment, billing and collections processes, you can not only better understand the factors that play into your pest control business’s DSO but also gain insight into how you can improve it. To learn more about improving your financial processes and getting paid faster with PestPac, speak with a representative today.