8 Ways to Improve Your DSO

One key driving force of all businesses is cash flow. Improving cash flow by focusing on your cash conversion cycle changes the trajectory of your business, reduces financial stress, and provides you with clarity on decision making as you free your mental capacity to focus strategically rather than operating daily in fight or flight mode.

What is Days Sales Outstanding (DSO)?

Days Sales Outstanding (DSO) is a measure of the average number of days it takes a company to receive payment for a sale. It’s a component of cash conversion cycle and a key metric to provide you with clarity on the journey of financial efficiency.

There are practical steps every business can take to reduce DSO, and in this article, I will highlight ten ways to reduce your DSO and improve your cash flow. Keep in mind, improving cash conversion cycle is not a one size fits all solution given the complexities of business; however, I guarantee applying some combination of these principles will help in reducing cash flow concerns in your business.

What’s the Formula for Days Sales Outstanding (DSO)?

Before we jump into the how, I wanted to provide the formula for DSO so that you could anchor your mental model on how the steps below will practically apply in your business.

DSO = (Average Accounts Receivable / Revenue) * Number of days in period.

For example, let’s say your average accounts receivable balance is $250,000, and you have a monthly revenue of $150,000. The calculation would be as follows:

($250,000/$150,000)*30 = 50 days sales outstanding

This tells you that on average you should expect to collect cash 50 days after you process a sale. Looking at benchmark data for DSO in your industry will give you a milestone to work towards and measure against. It's obvious that a high DSO can strain cash flow, so implementing strategies to reduce it is worth the time to implement in your business. 

8 Ways to Reduce DSO

1. Streamline and Automate Invoicing

One of the first steps is to streamline invoicing by automating and sending invoices promptly, ensuring that customers have all the necessary information to make payments on time. Reducing friction in this process both internally and externally through technology platforms that take the manual work out of the process and provide the ability for information and funds to flow seamlessly is a minimum requirement.

2. Set clear payment terms.

Transparency and trust between you and your customers are critical building blocks. Especially in today's world, where a large portion of transactions happen without human interaction. Practical ways you can build trust with your customers are by setting clear payment terms from the outset to avoid any confusion that could delay payments.

3. Provide Incentives for Early Payment.

Offering discounts for early payments can serve as a powerful incentive for customers to pay their invoices sooner and build strong customer relationships. Trust often leads to more reliable and timely payments due to the desire to maintain healthy working relationships that add value to all parties. 

4. Use Credit Check Services

From a checks and balances standpoint, you can also use technology platforms to facilitate conducting credit checks on new customers before extending credit, helping to identify those who might pose a payment risk.

5. Automate Your Dunning Process

Automating the process of following up on a regular cadence on overdue invoices is also vital; regular reminders can nudge customers to prioritize outstanding payments. Continual communication keeps the invoice top of mind.

6. Offer Multiple Payment Options

Knowing your customer profile is important to tailor your business processes. One way you can do this is by offering multiple payment options to facilitate quicker payments by making it easier for customers to settle their accounts.

7. Regularly Review Accounts and Health

Internally having a regular cadence to review accounts receivable helps you identify and address potential issues before they escalate, especially if you start seeing trends in the data for customers who historically have paid within credit terms. 

8. Train Your Team  

Finally, ensuring that the team is well-trained and understands the importance of cash flow will lead to more proactive management of receivables. The importance of continuous improvement training and education on DSO and more broad cash conversion cycle for your associates could be argued as more important than any process or platform you can use to drive efficiency. The key is taking the first step, starting the journey of financial health and awareness will forever change the long-term trajectory of your business.