Tips for Reducing DSO in Equipment Rental

In the fast-paced world of enterprise equipment rental, managing cash flow efficiently is crucial for sustained growth and profitability. One key metric that demands the attention of accounting teams is Days Sales Outstanding (DSO).  

For equipment rental companies, where cash flow is often tied up in tangible assets, it’s imperative to build and maintain fast payment periods with customers. Today we’ll look at: 

• Current industry overview
• Leading causes for high DSO 
• Identifying the reasons for late payments 
• Solutions to help accelerate DSO 
• How RentalMan helps
• Bonus – How AI helps 

Current industry overview (Q1 2024)

Before talking about the causes and solutions, let’s take a look at where some different industries are at with payment times. Every quarter, Dun & Bradstreet expands on information from the Credit Research Foundation’s National Summary of Domestic Trade Receivables (NSDTR) report to produce an overview on accounts receivable and days sales outstanding across a wide range of industries. This is a great place to start if you’re looking for some benchmarks to gauge your customers on. Here are a few snips from the report, highlighting the latest data from Q3 2023:

See the full report here > 

Understanding the DSO Challenge: 

Now that we’ve covered some interesting benchmarks let’s talk about some reasons that might lead to higher DSO. Various factors contribute to a high DSO, impeding the cash flow of equipment rental companies. These may include inefficient billing processes, unclear invoice terms, disputes over charges, and delays in customer payments. Moreover, the nature of the industry, with extended rental periods and complex contracts, adds further complexity to the billing and collection process. Here are some reasons that may be causing higher DSO:

8 Possible Reasons for High DSO: 

1. Seasonal Demand: Many equipment rental companies experience seasonal fluctuations in demand. During peak seasons, they may have high rental volumes, but customers may not pay immediately. These seasonal variations can lead to higher DSO during off-peak periods. 
2. Longer Rental Durations: Unlike some industries with shorter-term rentals, heavy equipment rentals can span weeks or months. Customers may require more time to complete their projects and therefore take longer to settle their invoices, contributing to higher DSO. In some cases, customers may not even be able to pay at certain times due to how they get paid for different phases of the projects they are working on. 
3. Complex Billing Structures: The rental industry often involves complex billing structures, with multiple factors affecting pricing, such as equipment type, rental duration, maintenance fees, and more. These complexities lead to delays in invoice preparation and customer reviews, ultimately affecting DSO. 
4. Dispute Resolution: Customers may dispute charges related to equipment damage, maintenance, or rental terms. Invoice accuracy is crucial to avoiding disputes. While it sounds simple, there are many factors that can cause invoice disputes or even outright rejections. 
5. Paper-Based Processes: Some equipment rental companies still rely on manual and paper-based invoicing and payment processes. These outdated methods slow down the billing and payment cycle, leading to higher DSO. 
6. Industry Competition: In a competitive marketplace, companies may offer flexible payment terms or negotiate longer payment periods to attract customers. While this may help secure business, it leads to higher DSO. 
7. Economic Factors: Economic conditions can influence customers’ ability to pay promptly. During economic downturns or industry-specific challenges, customers may delay payments, contributing to higher DSO. 
8. Geographic Considerations: Equipment rental companies may operate across different regions with varying payment practices and regulatory requirements. Managing these differences impacts DSO. 

Identifying Reasons for Late Payments with Your Customers 

That’s a lot of potential reasons for late payments from customers. It’s important to analyze your customer base to identify the root causes of the DSO issue so that you apply the right solutions. Here are a few things to look at during your analysis: 

8 Ways to Identify Late Payment Reasons: 

1. Customer Segmentation: 
   • Segment customers: Categorize customers based on their payment history, creditworthiness, and industry-specific factors. This allows for tailored approaches to managing different customer groups. 
2. Creditworthiness Assessment: 
   • Regularly review the customer’s credit history: Check the customer’s credit report and financial statements to assess their ability to meet payment obligations. As a customer moves closer to their credit limit, particularly if that is unusual behavior, it might be time for a review of the account. 
   • Evaluate credit references: Contact trade references provided by the customer to gather insights into their payment behavior with other suppliers. 
   • Consider credit scoring models: Use credit scoring models or software to quantify the customer’s credit risk based on various financial metrics and industry benchmarks.  
3. Payment History:
   • Analyze historical payment records: Review the customer’s payment history with your company to identify any past instances of delayed or missed payments. 
   • Examine patterns: Look for recurring patterns, such as specific months or seasons when payments tend to be delayed. Another reg flag could be if a customer remains within the terms but begins to use more of the available terms. 
4. Communication and Feedback: 
   • Engage in open communication: Maintain a dialogue with customers to understand their expectations and any potential issues they may have with your billing or invoicing processes.
   • Collect feedback: Encourage customers to provide feedback on their payment experiences, which helps identify areas for improvement. 
5. Industry and Market Analysis: 
   • Consider industry trends: Research industry-specific factors that may affect your customers’ ability to pay promptly, such as economic conditions, regulatory changes, or market competition. 
   • Assess market conditions: Evaluate the overall market conditions in regions where your customers operate, as economic fluctuations often impact payment behavior. 
6. Invoice and Billing Processes: 
   • Review invoice accuracy: Ensure that your invoices are accurate, clear, and easy to understand to minimize disputes and potential delays. 
   • Monitor invoice delivery: Track the time it takes for invoices to reach customers, as postal delays or inaccuracies in contact information leads to payment delays. 
   • Implement electronic billing: Transition to electronic invoicing methods to speed up invoice delivery and reduce manual errors. 
7. Contractual Terms and Payment Options: 
   • Review contract terms: Evaluate the terms and conditions of the rental agreement to ensure they are fair and reasonable for both parties. 
   • Offer flexible payment options: Provide customers with various payment methods and schedules to accommodate their financial preferences and capabilities. 
8. Payment Tracking and Automation: 
   • Implement payment tracking systems: Utilize accounting software or systems that tracks payment statuses and send automated reminders to customers for overdue payments. 
   • Automate payment processing: Streamline the payment process by enabling customers to make electronic payments easily, reducing the risk of human errors and delays. 

Solutions to Help Accelerate DSO 

After analyzing your customer base using the methods above, it’s time to start thinking about solutions to decrease DSO. As the saying goes, Rome wasn’t built in a day. Neither is a slick, perfected DSO strategy. Here are some ideas to help you start formulating a plan for tackling the challenges you face today: 

4 Ways to Expedite Days Sales Outstanding: 

1. Implement Efficient Invoicing Processes: Effective invoicing is the foundation of DSO reduction. Streamlining the invoicing process significantly impacts cash flow. Consider the following steps: 
   • Use digital invoicing systems: Transitioning to digital invoicing eliminates the delays associated with paper-based processes. It also allows for faster delivery and tracking of invoices. 
   • Automated invoicing: Invest in software solutions that automate the invoicing process. Automation reduces errors, ensures consistency, and sends reminders to customers for prompt payment. 
   • Clear and concise invoices: Ensure that invoices are easy to understand, with all relevant information such as due dates, payment terms, and contact details clearly displayed. 
   • Get ahead of damage related disputes or rejections: Damage charges on invoices are a common reason for disputes or even outright rejections from customers. Naturally, that drives up DSO. You can get ahead of these issues by adding photo capture during the check out and check in processes. 
2. Implement a Robust Billing System: Billing accuracy is critical to reducing disputes and payment delays. Utilize advanced billing systems to: 
   • Track equipment usage accurately: Utilize technology to monitor equipment usage in real-time, ensuring that customers are billed accurately for the time they use the equipment. 
   • Offer flexible billing options: Provide customers with multiple payment methods and schedules, enabling them to choose what works best for their financial situation. 
   • Implement proactive billing: Anticipate upcoming billing cycles and send notifications to customers well in advance, giving them time to plan for payment. 
3. Credit Management and Risk Assessment: Effective credit management identifies high-risk customers early and reduces the likelihood of unpaid invoices. Consider these strategies: 
   • Conduct thorough credit checks: Before extending credit to customers, perform comprehensive credit checks to assess their creditworthiness and ability to pay. 
   • Set credit limits: Establish credit limits for customers based on their financial stability and payment history, preventing them from accumulating large unpaid balances. 
   • Monitor payment patterns: Continuously monitor customer payment behaviors and act swiftly if irregularities or delinquencies arise. 
4. Streamlined Collections Process: A well-organized collections process reduces DSO. Implement these practices: 
   • Prioritize collections efforts: Focus collections efforts on overdue accounts with the highest balances or longest overdue periods. 
   • Offer incentives for early payment: Encourage prompt payments by offering discounts or other incentives for customers who settle their invoices ahead of schedule. 
   • Leverage collections technology: Utilize collections management software to automate follow-up communications and escalations, saving time and increasing efficiency.