In an era of unprecedented abundance of technical tools, a slightly ironic phenomenon is that seemingly simple accounts receivable collection—especially for the accounts receivable departments of SaaS (Software as a Service) companies—has not been running more smoothly.

CFOs and other leaders responsible for treasury management should recognize the importance of closely monitoring Days Sales Outstanding (DSO), as it directly impacts working capital management and overall financial health.

DSO is a key metric that measures the average number of days a company takes to collect payments from customers. A rising DSO may signal cash flow issues and inefficient accounts receivable management, which can lead to reduced liquidity and increased financial risk.

However, according to a recent report by Capchase, since 2021, the median DSO for companies of all sizes has risen from 31 days to nearly 40 days. SaaS companies with annual recurring revenue (ARR) between $1 million and $9.9 million face the longest DSO and are at higher risk of revenue loss due to unpaid invoices being forgotten, lost, or abandoned.

SaaS companies in this ARR range or smaller are more severely affected by unpaid invoices than larger enterprises, as they often rely on timely payments to cover operational and development costs. Larger enterprises typically have more substantial buffer funds, making unpaid invoices a relatively lower urgency.

One of the challenges is that many companies—especially SaaS companies with annual recurring revenue below $10 million—are busy with the complex balancing act between closing larger deals and funding operations and development. Meanwhile, for these smaller businesses, a few overdue invoices from major customers are enough to push them to the brink of losses.

To encourage customers to be more creditworthy, many companies are offering stricter payment terms. However, DSO has still increased by an average of 7 days across industries and performance groups, meaning that despite stricter terms, collecting payments on time is more difficult in today's economic environment.

Since 2021, overdue payments have increased significantly, with ripple effects across various industries. For example, in 2021, invoices overdue by more than 50 days accounted for less than half of all overdue invoices; by September 2023, this proportion had risen to over 78%.

The reason for the rising DSO is that many customers—and generally many companies—are holding onto cash for longer periods. Driven by rising interest rates and uncertain macroeconomic conditions, businesses are doing so because they are unsure when the next capital infusion (such as a venture capital round or debt financing) will be available.

Due to increased purchase scrutiny and negotiations, sales and renewal cycles are lengthening, and customers are likely to demand longer net payment terms when signing contracts, putting suppliers in a bind. Finance teams are also stretched thin, busy with fundraising or day-to-day operations, and seeking ways to reduce the manual burden of invoice collection.

Looking ahead, SaaS companies should invest in more robust collections infrastructure, whether built in-house or by subscribing to mature tools, to assist with efficient invoicing, sending reminders, and changing payment terms. The ideal tool should leverage automation to improve customer experience, freeing finance teams to focus on more important matters while making cash flow more predictable.

Beyond automation, personalization is equally key. Many automated collections tools allow for customization, making customers feel cared for, understood, and valued. Efficient collections stem from a combination of seamless payment options, automation, and human touch. With stronger collections capabilities, SaaS companies of all sizes can expect to see DSO decline and cash flow stabilize.

As we have collectively experienced over the past two years, the SaaS industry is extremely sensitive to macroeconomic conditions, for better or worse. To survive economic ups and downs, companies must focus on stability, predictability, and sustainable growth, and investing in improving DSO is an excellent starting point.