A number of IT companies are seeing their Day Sales outstanding (DSO), or the average number of days it takes a company to collect payments after a sale is completed, come down dramatically during the quarter that ended in September 2020.
In fact, TCS said its DSO, in dollar terms, stood at an all-time low at 65. A low DSO value means that it takes a company fewer days to collect its accounts receivable. DSO is often referred to as days receivables or average collection period and a part of cash conversion cycle for firms. This metric is important as it tells about a company’s cash flow.
What others reported
Tech Mahindra reported a 15-quarter low DSO at 97. HCL Tech’s stood at 79, including unbilled. According to Prateek Aggarwal, CFO, HCL Tech, this is seven days less compared to the 86 days the company has seen in the last three quarters.
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Nilanjan Roy, CFO, Infosys, said collections remained robust with DSO reducing by two days to 69, compared to the previous quarter.
What led to the turnaround?
IT executives point out a couple of reasons that largely contributed to the lower DSOs.
At the time of pandemic in April, many IT majors had pointed out that they expect pricing pressures, extension of payments and discounts. IT executives now say that it has largely eased as customers’ priorities are changing and they want to invest in technology.
Sachin Tikekar, co-founder & President, KPIT Technologies, which is in the automotive engineering space and counts large car makers as its clients, pointed out that companies are investing in software and the cuts they are taking are outside of it.
“Software is the future. You don’t want to kill the future,” he added.
“During H2 FY21 (Second half), and going forward, we are not seeing too much pressure,” he added.
Executives also point out that large clients were able to pay amidst the pandemic and that definitely helped.
Manoj Bhat, Chief Financial Officer, Tech Mahindra said: “Most of the larger customers are in very reasonable financial position despite the pandemic. We have not experienced much of the extension of payment terms. Most of our customers are large Fortune 500 companies. They take care of all their partners.”
According to Bhat, that contributed as well in terms of Tech Mahindra’s DSOs coming down. “I think, pretty much, across the board, you have seen that in the industry. During these times, anybody who had larger customers has seen an improvement in DSOs,” he added.
Third, the processes for billing these companies have put in place and continuous communication with customers helped.
Jatin Dalal, CFO, Wipro in a recent interaction with Moneycontrol, said: “We work closely with customers. All customers want to pay on time. We coordinate well with their payments team. It’s just constant focus on our smooth process I would credit.”For the quarter ending September, Wipro’s cash collections were 164 percent of the net income. “I would say that we remain very cautious in terms of how agile our process is and we bill it very quickly,” he added.