There are good reasons for extending credit to your customers, but processing time is not one of them. Net30 as a standard for all customers is an antiquated credit term based on antiquated invoice processing of yesterday. Now, there’s a real opportunity to introduce the notion of MSO (minutes sales outstanding) rather than be anchored on DSO (days sales outstanding).
The Net30 policy became a standard when an invoice had to be physically printed, put in an envelope, and sent through the postal network. At the customer side, that invoice would be routed through inter-office delivery and processed manually by the customer’s accounts payable. The check would have been physically printed, put in an envelope, and sent back through the postal network. With those constraints, Net30 had a place.
It was simple, but it was slow.
The world is different now. A supplier’s ERP is able to send the invoices directly to the customer’s ERP or AP systems via APIs eliminating the need for re-entry at the customer. On the customer side, accounts payable professionals can execute payments electronically using credit cards or ACH. The advent of APIs and electronic payments means that invoicing delivery through to payment can be accomplished in minutes if not seconds if not milliseconds.
So why are we still using Net30? Why are 50% of payments still done by paper check? Why do suppliers login to AP portals to upload invoices rather than use automation and APIs? The answer: friction. While ACH is much cheaper per transaction compared to checks and while the Internet provides all the connectivity and protocols to automate workflow between a supplier’s AR and a customer’s AP, the effort to implement these improvements remains expensive.
How is friction measured? Time to automation! Implementation times for automation are the primary point of friction. ACH implementations within ERP average 9 months or more. Integration for a supplier into a procurement network via API is typically quoted at 8 weeks per customer – imagine implementing 100 customers? The friction is high.
The other challenge to leaving Net30 behind is incentive. Most customers don’t have an incentive to change how they pay, but suppliers can certainly do that by changing credit terms whether it be timing, discounts, or methods. Incentives are underutilized, and present an opportunity for archaic business practices to evolve with the times. Look for a dedicated post on this soon.
By eliminating friction and leveraging incentives, DSO can become MSO. Extending credit should be planned, predictable, and profitable. MSO represents those attributes. At Globys, we are working on solutions to eliminate the friction and optimize the use of incentives.