Before COVID-19, boards often asked the finance team what’s our cash situation? But in light of the pandemic, this chant is even louder because boards want to be prepared for a runway without cash inflows due to delayed, interrupted, or non-customer payments.

Part of the finance team’s job is continuously balancing cash inflows and outflows so that company leadership doesn’t need to worry about such crash landings. According to Brian Go, former accounting manager at Planful, flipping the DSO-to-DPO ratio from negative to positive is one of the best ways to achieve that ideal cash balance, i.e., cash nirvana.

DSO-to-DPO Ratio

A connected finance organization uses many metrics to track its cash performance, including days sales outstanding (DSO) and days payable outstanding (DPO). DSO helps you know how much and how quickly cash is coming into the business, and DPO reveals how much and how quickly cash is exiting it.

If you’re paying cash out faster than you’re bringing it in, your DSO-to-DPO ratio is inverted or negative. Whereas, if you’re bringing cash in faster than you’re paying it out, you have a positive DSO-to-DPO ratio. You can reach that cash nirvana by strategically pulling the levers on either side of the equation.

Pulling the Accounts Payable Levers

You have more control on the AP side because you decide who to pay, when, and how much. There’s a limit to this control because you need your vendors in order to be able to fulfill customer orders, but you still have some room to ease up or push down on the AP accelerator as needed.

For example, ever since COVID-19 hit, Brian says he was been meeting weekly with Planful’s former controller, Molly Yu, to strategically plan each week’s AP run in order to optimize the company’s cash flow performance. “We prioritize critical vendors,” he says. “Then, depending on how much cash remains, we use our AP aging reports to determine who gets paid next. We also run scenarios to see how paying other bills would impact cash flow from week to week.”

Pulling the Accounts Receivable Levers

The AR side is more volatile because you have to influence someone else to pay you, but there are still ways to move the AR levers:

• Conduct more frequent collections updates with those who have influence with customers, such as the sales, customer success, or implementation teams.
• Replace manual AR processes with an automated AR system to speed up invoice creation and delivery, to reference the right purchase order, and to send the invoice to the correct contact.
• Use customizable invoice and dunning campaign templates to create a cohesive, high-touch message to customers.
• Collaborate with sales to make sure the timing or messaging of dunning campaigns don’t jeopardize renewals, future orders, or invoice payment.

A Shift in Perspective

Flipping your DSO-to-DPO ratio is critical to achieving a better cash position. As Brian points out, it’s really just a matter of more closely controlling when you send cash out and making a more concerted effort to positively influence when you bring cash in from your customers.

Learn more of Brian Go’s thoughts on AR automation and the DSO-to-DPO ratio by listening to Tesorio’s recent webinar How Great CFOs Empower Leading AR Teams and how leading AR teams make CFOs look great.