5 pro tips to reduce DSO and skyrocket your profits

If you’re an average third-party logistics provider (3PL), you likely have cash flow tied up in external sources and use a bank credit line to stay operational.

Usually, you rely on the spot market to cover about 40% of your shipments. However, a soft market means those shipments diminish. This results in more reliance on contracted agreements. When there’s less demand and fewer loads, every dollar matters.

Many 3PLs must turn to managing the costs they can control. Yet legacy freight invoice audit and payment (FAP) processes fail to keep up with a dynamic industry. Without tools that support fast operations, high days sales outstanding (DSO) is inevitable. It leads to less cash on hand and a higher chance of bad debt hitting your financial reports.

It’s important to leverage fast and accurate audit and payment processes. You must ensure that it can handle information from thousands of carriers and customers, along with supply chain shifts. Before we get into how to do that, let’s first cover why it’s so tricky to reduce DSO.

Why is reducing DSO difficult in the current market?

Days sales outstanding is the number of days it takes for a 3PL to collect payment from their customer. DSO is commonly known as aging – outstanding invoices that exceed late payment limits, which are usually 30 to 90 days. At that time, you have to report unpaid invoices as losses on your profit and loss statement (P&L).

Once you send an invoice to a shipper, the outcome is out of your hands. However, there are steps you can take to streamline the payment process and increase the odds of on-time payment.

Here’s a breakdown of some common obstacles when reducing DSO:

• Coordinating documents and deadlines from multiple parties. You receive documents from both carriers and customers. In addition, you must track multiple payment terms and customer agreements per shipment. Juggling all of this is no easy feat, which makes your accounts receivable (AR) and accounts payable (AP) process arduous. The longer it takes to create an invoice, the higher the DSO.

• Streamlining cross-functional collaboration. As a 3PL, your success is defined on the cross-functional between account management, carrier management and finance. You all must be working together to deliver the best offer and experience to your customers with the right margin for you. If there is an unexpected accessorial because of a miscommunication or bad data, that can be the difference between you making money on a load or losing it.
• Managing invoice adjustments from carriers. Adjustments happen when an invoice doesn’t match the expected shipment cost. You may have to eat the adjustment cost, especially if you've already sent an invoice to your customer. Or you can risk passing the cost along to the shipper, which could damage your relationship with them.
• Sending invoices as quickly as possible. The longer it takes to create and send an invoice after a load is delivered, the longer it takes to get paid. Several factors can get in the way of streamlining the invoicing process: time-consuming AP audits, missing documentation, and approval queues. Yet you still have to pay the carrier, even if a shipper fails to pay on time.
• Managing high interest rates. If you already have a high DSO, you function with less liquidity and more credit. Rising interest rates are an additional expense. In turn, leaning on credit lines is too much of a financial burden.

There’s no shortcut to solving all these challenges at once. But you can arm yourself with reliable, automated billing processes and high-quality data to reduce days sales outstanding. How does data support DSO reduction? Though carriers supply data for every shipment, each structures it differently and uses unique codes for the same line items. Because of this, data pulled from disparate sources is likely incomplete and messy. To properly track your workflows and identify bottlenecks, you need clean data and clear processes. You have data in your TMS, invoices, and shipment documents. But you need intelligent software to extract and standardize it in one place. You can gather a lot of insights by looking at your AP and AR:AP teams look at the following:

• The average amount of time from delivery to receipt of a carrier invoice
• The average amount of time from carrier invoice receipt to approval
• The average number of adjustments per carrier invoice
• The average time to payment for approved invoices, either at-term or early using quick pay
• The time it takes to send a customer invoice from AR after a carrier invoice from AP was approved

AR teams look at the following:

• The average time from carrier invoice approval to customer invoice created
• The average time from customer invoice creation to when it’s sent to the customer
• How long it takes for customers to fulfill the invoices – whether they’re paid late, at-term, or early

Clean and standardized data informs how each of these cost centers performs. Aggregating the data reveals where time-consuming processes cost money. The faster you validate and process invoices, the lower your invoice aging will be. What’s more, you’ll be less likely to see unpaid invoices hit your P&L.

5 tips to reduce DSO

1. Develop a relationship with your customer’s AP Team

‍Transportation is a relationship-based industry. Investing in your partnership helps whether you need to make an ad-hoc adjustment or want to be consistently paid on time.Establish strong working collaboration with shippers by doing the following:

• Meet customer requirements to speed up payment time. Before you send an invoice to a customer, ensure the correct documents are attached for easy validation. You’ll face endless back and forth between shippers and carriers without proper proof for each charge. When that happens, the risk of late payments goes up.
• Establish service-level agreements (SLAs) for exception management. This prearranged agreement sets the standard for both parties – you’ll know how to resolve exceptions before they come up.
• Leverage data-driven insights to find cost-saving opportunities. High-quality data shows where your operations could be more efficient. The smoother your workflows run, the more your shipping partners can rely on you.

Investing in building strong customer relationships will set you and your customers up for success.

2. Automate freight document processing

‍The clock starts ticking as soon as you receive a load tender. There are two sprints that dictate how quickly you move from tender receipt to payment:

• The first sprint: You work as quickly as possible to find a truck, schedule delivery times with a warehouse, and ensure you meet the load conditions. Traditionally, a large part of this process is manual.
• The second sprint: Once the load is delivered you need to create an invoice, ensure it’s accurate, and send it to your customer. But manual workflows create bottlenecks. An individual human needs to source all the freight documentation to inform the invoice prior to sending it. This process is error-prone and time-consuming, directly affecting DSO.

Here again, software cuts processing time down to hours instead of days or weeks.Ultimately, the less time you spend reviewing invoices and their documents, the faster you get paid. When you leverage software to automate time-consuming tasks, you’re more likely to see more profitable numbers on your P&L.

3. Centralize invoice and shipment data

Automated document processing and data extraction are important. Yet you also need to centralize that information. Data – even if it’s high-quality – is hardly useful when it lives in disparate places.

Centralized data reduces average DSO by doing the following:

• Increase insights: When data is available to everyone, including you and your customers, decision quality improves. You can give cost-saving recommendations to shippers to increase your book of business. You can understand the true cost of a lane to better price your loads.
• Improve efficiency: The average person scheduling a load thinks about everything from driver work regulations to balancing the three-day sweet spot. There is no time to manually dig through disparate data points. Centralized data puts crucial insights right at the fingertips of anyone making transportation decisions. This directs time and energy to the most impactful places.
• Establish benchmarks: Use the data you currently have to track how data-driven decisions improve your operational efficiency going forward. You’ll be able to quickly assess what works and what doesn’t.

Without storing your data in one place, looking for cost-saving opportunities is like hunting down a needle in a haystack. This data collection provides a bird's-eye view, showing you what bottlenecks hurt your DSO.

4. Expedite invoice creation

Speed is critical when sending invoices to shippers. Using logistics-AI software to streamline the process will help you do at least two things:

• Generate invoices automatically: Manual invoice creation is time-consuming and error-prone. 3PL brokers boost their efficiency when they turn to technology to generate their AR invoices. Now, you can create and send invoices based on customer preference (EDI, API, emails) in one click without leaving Loop.
• Ensure you have all the necessary documentation: You have to be diligent about getting key information to back up carrier invoices. With thousands of customers, it’s difficult to adhere to their various compliance rules by matching and attaching the right documents to an invoice. For example, if a driver misses a delivery window because of a flat tire, they have to provide proof of the incident. Logistics-AI software automatically flags missing documentation so you can request it ASAP.
• Manage multiple payment terms: You handle both shipper and carrier payment terms. As you know, they don't always align. Say a carrier requires invoice fulfillment in 30 days, but your shipper agreement has net 90 terms. You could end up floating your customer for up to 60 days while waiting for payment.

Logistics software monitors the varying payment terms and tracks the life cycle of each invoice. That way, you have full visibility and control over your company’s cash flow.

The faster invoices are created and verified, the faster payment happens.

It’s true that speed is important, but that pace can’t be at the expense of accuracy. Logistics-AI software allows you to achieve both. So you get greater control over your spending.

5. Offer multiple payment options

When looking to lower DSO, cater to your customers’ preferences and needs to encourage at-term (or early) payments. For this, you need a flexible, digital billing process. Some freight payment software uses financing tools like quick pay.

Quickpay is when you pay your carrier earlier for a small fee. You can leverage an associated financial institution or your own balance sheet. If you use a bank, depending on your agreement, they can extend your term or give you a rebate back. In return, you can maintain better cash flow but enable your carriers to get paid early. It’s a win win.

Reduce DSO with Loop

Low average DSO means fewer cash flow problems. In the current turbulent market, it’s more important than ever that you have liquidity.

It’s not possible to have every part of the process in your control. However, you can leverage high-quality data and automated processes to speed up operations while maintaining accuracy.

Intelligent software like Loop automates the FAP process to enable DSO reduction. Get in touch with Loop today to learn how it can help you identify key cost-saving opportunities.

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