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Guest Column: Finding Cash within Your Own Operations with DRO
Days revenue outstanding is seldom tracked but can be easily recovered — and can bring cash to the bottom line without upsetting customer and supplier relationships
Your business needs cash — to grow, to buy equipment, to seek new customers. But in today's tight credit markets, finding that cash from outside sources like bank loans or stock offerings is more difficult than ever before.
What's a business to do? You can (and should!) tighten your cash collections. You may even attempt to renegotiate better terms with your customers and suppliers.
But what most businesses fail to realize is that your accounts receivables hold hidden treasure — and lots of it. Best of all, you can capture this gold without upsetting customer and supplier relationships.
Let me explain what I mean.
There is cash to be found between service or shipment completion and cash in hand. "Days sales outstanding" (DSO) — the amount of cash between invoice creation and payment received — has been an important metric for companies in many industries for some time. Companies have been targeting this for years with mixed results.
So look further. What is not as well known is that there is cash elsewhere in the cycle — specifically before the invoice is created. This period between service completion and invoice creation is something we at Aveus call "days revenue outstanding," or DRO.
DRO (days before invoicing x dollars) exists only because of internal processing time. This is cash you have earned but can't yet touch. You can't even invoice yet. This time is seldom tracked and thus is much longer than most companies know. This cash needs to be, and can be, recovered.
The benefit to a business of reducing DRO can be huge. A company with $500 million in annual sales can have a DRO value of $1.4 million per day. If five days can be reduced in the cycle between service completion or shipment and invoice creation, the company can realize a $10 million one-time cash infusion back into its business, without asking the customer or your outside banker to do anything.
Beltmann Group Leverages DRO
A case in point: Beltmann Group Incorporated, a moving and storage company with three divisions and 13 offices across the U.S., has realized significant benefits from DRO. The company is a $100 million-plus provider of moving and logistics services. When the market for individual and corporate moves began to slow, the company sought to tighten cash flow by analyzing its internal processing of paperwork leading up to invoicing the customer. Steve Kosel, vice president of accounting, turned to Aveus to do the analysis.
What's a business to do? You can (and should!) tighten your cash collections. You may even attempt to renegotiate better terms with your customers and suppliers.
But what most businesses fail to realize is that your accounts receivables hold hidden treasure — and lots of it. Best of all, you can capture this gold without upsetting customer and supplier relationships.
Let me explain what I mean.
There is cash to be found between service or shipment completion and cash in hand. "Days sales outstanding" (DSO) — the amount of cash between invoice creation and payment received — has been an important metric for companies in many industries for some time. Companies have been targeting this for years with mixed results.
So look further. What is not as well known is that there is cash elsewhere in the cycle — specifically before the invoice is created. This period between service completion and invoice creation is something we at Aveus call "days revenue outstanding," or DRO.
DRO (days before invoicing x dollars) exists only because of internal processing time. This is cash you have earned but can't yet touch. You can't even invoice yet. This time is seldom tracked and thus is much longer than most companies know. This cash needs to be, and can be, recovered.
The benefit to a business of reducing DRO can be huge. A company with $500 million in annual sales can have a DRO value of $1.4 million per day. If five days can be reduced in the cycle between service completion or shipment and invoice creation, the company can realize a $10 million one-time cash infusion back into its business, without asking the customer or your outside banker to do anything.
Beltmann Group Leverages DRO
A case in point: Beltmann Group Incorporated, a moving and storage company with three divisions and 13 offices across the U.S., has realized significant benefits from DRO. The company is a $100 million-plus provider of moving and logistics services. When the market for individual and corporate moves began to slow, the company sought to tighten cash flow by analyzing its internal processing of paperwork leading up to invoicing the customer. Steve Kosel, vice president of accounting, turned to Aveus to do the analysis.
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