Effective cash flow management is a critical aspect of running a business, especially for multinational companies (MNCs) with subsidiaries in India. One of the key metrics that help evaluate a company’s cash flow efficiency is Days Sales Outstanding (DSO). DSO measures the average number of days it takes a company to collect payments after a sale has been made. In India, the collection of outstanding payments can be particularly challenging due to a variety of factors such as regulatory complexity, business culture, and economic fluctuations.
According to a report by Dun & Bradstreet, the average DSO for Indian companies was 57 days in 2023, compared to the global average of around 45 days. This extended period can lead to cash flow problems, limiting the ability of companies to reinvest in operations, expand, or meet their financial obligations in a timely manner. For MNCs operating in India, improving DSO is essential to maintaining financial health and sustaining growth.
Understanding the Challenges of DSO in India
Before diving into strategies to improve DSO, it’s essential to understand the specific challenges Indian subsidiaries face when managing receivables:
- Complex Regulatory Framework
India has a unique regulatory landscape that can affect payment cycles. Taxation policies, local compliance requirements, and changes in government regulations can all add complexity to the billing and collection process. For example, the introduction of the Goods and Services Tax (GST) added layers of documentation and compliance that companies had to navigate, sometimes delaying payment collections. - Cultural Factors
Business practices in India often differ from those in other parts of the world. Companies may encounter a more relaxed attitude toward payment deadlines, with buyers sometimes negotiating extended payment terms or delaying payments due to financial constraints. This cultural aspect can prolong DSO and impact cash flow. - Economic Uncertainty
Economic challenges, such as inflation, currency fluctuations, and liquidity crises, can also delay payments. Clients may take longer to settle invoices if they are experiencing financial difficulties, which can push DSO higher for MNC subsidiaries. - Lengthy Payment Cycles
In India, industries such as construction, real estate, and manufacturing often have longer payment cycles compared to other sectors. Businesses in these sectors may deal with delayed payments, which directly impacts their DSO.
Strategies to Improve DSO in India Subsidiaries
Given the challenges above, MNCs need a proactive approach to improving their DSO. Implementing the following strategies can help shorten payment cycles and ensure better cash flow management.
1. Implement Automated Invoicing Systems
One of the most efficient ways to improve DSO is to automate the invoicing process. Automated invoicing software can reduce human errors, ensure timely billing, and streamline the entire accounts receivable process. Systems such as Zoho Books or QuickBooks allow companies to send invoices promptly, set automated payment reminders, and track outstanding payments in real time. These systems also help in customizing payment terms and offer visibility into aging invoices, enabling businesses to prioritize collections effectively.
2. Offer Flexible Payment Options
Providing customers with multiple payment options can accelerate collections. By offering digital payment solutions, such as online bank transfers, UPI payments, or credit card options, companies make it easier for customers to settle their invoices on time. India’s adoption of digital payments has grown significantly, with UPI transactions hitting a record 10 billion in June 2023, according to NPCI data. Offering flexible payment options ensures that clients can pay in a way that suits them best, which can help lower DSO.
3. Strengthen Credit Policies and Risk Assessment
MNCs should evaluate their credit policies to ensure they are not extending too lenient payment terms to clients. A thorough credit assessment process can help identify high-risk customers who may delay payments. By setting stricter payment terms for such clients or requiring upfront deposits, companies can protect themselves from delayed collections. Tools like CreditRiskMonitor can assist businesses in monitoring the financial health of their clients and determining appropriate credit limits.
4. Use Early Payment Discounts
Offering early payment discounts is an effective strategy to encourage clients to pay ahead of schedule. For example, offering a 2% discount on invoices paid within 10 days can motivate clients to clear their dues quickly. While this may reduce the overall amount collected, it can significantly improve cash flow and lower DSO. A well-structured discount policy can be a win-win for both the company and its clients, fostering better financial discipline.
5. Enforce Penalties for Late Payments
To ensure that clients adhere to payment deadlines, MNCs can introduce penalties for late payments. This approach, when implemented with transparency, can act as a deterrent against delayed payments. Clearly stating the penalty clauses in contracts and invoices will encourage clients to prioritize timely payments.
6. Improve Communication with Clients
Proactive communication with clients is essential for timely collections. Establishing a regular follow-up routine to remind clients of upcoming payments or overdue invoices can prevent delays. Businesses should leverage customer relationship management (CRM) systems to maintain detailed records of client interactions, helping the accounts receivable team manage collections more effectively.
7. Outsource Accounts Receivable Management
For many MNCs, outsourcing accounts receivable management to professional service providers like Finsmart Accounting can be a game-changer. Outsourcing allows companies to leverage the expertise of professionals who specialize in managing collections, improving DSO, and ensuring compliance with local regulations. By focusing on core business activities and leaving accounts receivable management to experts, MNCs can achieve better cash flow control.
8. Use Financial Technology for Real-Time Monitoring
Advanced financial technology tools like SAP Ariba and Oracle NetSuite offer real-time monitoring of receivables. These platforms enable businesses to track outstanding invoices, aging receivables, and payment trends across different regions. With the ability to generate real-time reports, companies can gain better visibility into their cash flow and make data-driven decisions to improve DSO.
Conclusion: Leverage Expertise for Improved DSO
Improving Days Sales Outstanding is essential for maintaining the financial health of any business, but it’s particularly critical for MNC subsidiaries operating in complex markets like India. By leveraging modern technology, streamlining internal processes, and implementing robust credit policies, companies can significantly reduce their DSO and improve their overall cash flow. Tools such as automated invoicing systems, flexible payment options, and outsourced accounts receivable management can provide the necessary support for MNCs to improve collections and maintain financial stability.
For MNCs seeking expert assistance in improving DSO and managing their accounts receivable efficiently, Finsmart Accounting offers comprehensive solutions tailored to meet the unique challenges of doing business in India. With a deep understanding of the local market and regulatory landscape, Finsmart can help optimize your financial processes, reduce DSO, and ensure better cash flow management. Contact Finsmart Accounting today to learn more about how we can support your business.
Founder & Director
Shalaka Joshi, a Chartered Accountant passionate about outsourcing and problem-solving, brings over 20 years of extensive experience in accounting, payroll, and MIS reporting to her professional endeavors
