In any business, cash flow is king, this is especially true for those in the logistics space. With the economic uncertainty and the impact that it has had on the freight market, it is imperative for every organization to improve their cash position.
One key metric that every third-party logistics providers (3PL) and freight brokers should be measuring is Days Sales Outstanding (DSO). DSO measures the average number of days it takes for a company to collect payment after a sale has been made. Reducing DSO can offer several tangible benefits, and in this article, I will explore the top four advantages that can be realized when DSO is reduced.
Improved Cash Flow
A reduction in DSO directly translates into improved cash flow. When you collect payments from your customers more quickly, you have more capital on hand to cover your operational expenses, invest in growth opportunities, or pay down debt.
According to one industry study companies that optimized their order-to-cash process, including reducing DSO, experienced a 17% increase in cash flow from operations compared to their peers.
In our own analysis of an enterprise customer, we found that simply reducing DSO by one day improved monthly cash flow by more than $300K. Having this kind of working capital provides the financial flexibility organizations need to invest in key growth initiatives.
Lower Financing Costs
Financing costs can be a significant burden for brokers and 3PLs, especially when relying on external financing to support your operations. By reducing DSO, organizations have the ability to reduce their reliance on costly short-term loans or lines of credit (LOCs).
Beyond reducing the reliance on these funding mechanisms is the payments that need to be made on loans or LOCs. Having just a one-day reduction in DSO can result in a 1% decrease in annual interest expense. This means that as your DSO decreases, you’ll be able to allocate less of your revenue towards financing costs and increase your profitability.
Enhanced Profit Margins
Shortening your DSO can also have a positive impact on your profit margins. When you collect payments faster, you reduce the risk of bad debts and associated write-offs. Additionally, you free up resources that might otherwise be tied up in uncollected accounts receivable.
The freight market demands reliable partners who can provide efficient and cost-effective services. Companies with lower DSO are in a position to offer competitive pricing and improved service levels, as they have the financial flexibility to invest in technology, infrastructure, and talent. It is these investments that enable the delivery of great service which breeds customer loyalty.
Many believe that DSO is just a financial metric, however it’s a strategic imperative for freight brokers and 3PLs. The benefits are clear and quantifiable: improved cash flow, lower financing costs, enhanced profit margins, and a competitive advantage in the market. By optimizing your order-to-cash processes, you can achieve these advantages and position your company for sustainable growth and success in the logistics industry.