How to Reduce Days Sales Outstanding (DSO)

Days Sales Outstanding (DSO) is a critical financial metric that measures the average number of days it takes for a company to collect payment after a sale has been made on credit. A high DSO indicates that a company is taking longer to collect its receivables, which can tie up capital and hinder growth. Reducing DSO is a top priority for CFOs and finance teams looking to optimize cash flow and improve working capital efficiency.

How to Calculate DSO

To manage DSO effectively, you first need to measure it accurately. The standard formula for calculating DSO over a specific period is:

DSO = (Average Accounts Receivable / Total Credit Sales) x Number of Days in Period

By tracking this metric monthly or quarterly, finance teams can identify trends and measure the effectiveness of their collection strategies.

Strategies for Reducing DSO

Improving your DSO requires a multi-faceted approach that spans the entire invoice-to-cash cycle. Here are several proven strategies:

• Automate Invoicing: Send invoices immediately after a sale or service delivery. Errors in manual invoicing often lead to payment delays; automation ensures accuracy and speed.
• Offer Early Payment Discounts: Incentivize customers to pay sooner by offering a small percentage discount (e.g., 2/10 net 30).
• Implement Proactive Collections: Don't wait for an invoice to become overdue. Send automated reminders a few days before the due date.
• Streamline Payment Methods: Make it as easy as possible for customers to pay. Offer digital payment options like ACH, wire transfer, and credit cards through a self-service portal.
• Tighten Credit Policies: Regularly review customer credit limits and payment history to mitigate the risk of non-payment.

The Impact on Working Capital

Reducing DSO directly impacts your company's liquidity. By accelerating the conversion of receivables into cash, you improve your cash conversion cycle and free up working capital that can be reinvested in the business, used to pay down debt, or returned to shareholders. In a high-interest-rate environment, the value of "cash in hand" is even more significant.

Modern financial technology, such as NAYA's operational ledger, provides real-time visibility into AR health and automates the reconciliation process, making it easier than ever to achieve and maintain a low DSO.