Cash flow concerns are often a significant issue for many businesses. Without healthy cash flow management, a company’s long-term efficiency and growth may be at risk. However, businesses that struggle with cash flow problems often cannot figure out the root cause of their issues. I’ve seen this struggle at many of the companies I’ve helped over the years, and there is one common culprit that is usually causing the problem: a high Days Sales Outstanding (DSO).
What is Days Sales Outstanding (DSO)?
DSO measures the average number of days it takes a company to collect payment after making a sale. When a company has a high DSO, there are likely a few factors causing the issue, like inefficient payment processing or collection processing. A low DSO is usually an indicator that payments are being collected promptly and processed quickly.
A DSO measurement is calculated by dividing accounts receivable by credit sales during a given period and multiplying by the number of days in that period. For most businesses, a DSO under 45 days is the ideal. Companies must track their DSOs to understand how efficient their payment processing is and how healthy their cash flow management processes are. Lenient credit policies or poor collection practices often contribute to a rising DSO measurement. So, regularly tracking your DSO and comparing it to previous periods is a great way to assess your company’s financial health and cash flow management over time.
How can a treasury strategy help improve your DSO?
Improving a DSO score is a collaborative effort between all departments at a company. Each department must have processes to communicate its role in processing a sale or collecting a payment. These processes must be efficient enough to ensure they are completed promptly so the DSO remains acceptable. As a treasury strategist, I often look at DSO measurements for signs of inefficiencies between departments. When I help companies develop a better strategy for managing their accounts receivable department, we outline an acceptable DSO measurement and a means of tracking it within each department. With this indicator in place and a review process, it becomes easier for companies to assess their financial health when my time consulting their business is over. In a recent PYMNTS article on the role of DSO management, Steve Smith, global director for strategic projects at Esker, said: “Without top-down buy-in, DSO management falls through the cracks because it’s not the responsibility of just one department [which is why] we’ve seen a growing emphasis on the need for DSO management.”
Integrating automated payment processing tools
Integrating automated payment processing tools and solutions into a company’s account receivable process can help improve a DSO metric. Many of these tools have enhanced capabilities that make tracking payments and cash flow more manageable, so companies spend less time on manual and inefficient processes. These tools are becoming more advanced every day, and AI capabilities are becoming part of the solution now, too. For example, new AI tools can automatically send out invoices once a sale is finalized to shorten the collection period and optimize cash flow. For many companies that still batch their invoices once or twice a month to send out, this process could significantly increase the speed of receiving payments and alleviate the manual labor needed for invoice preparation and collection. Solutions like this and others are tools my team and I typically recommend for our clients.
Let’s improve your company’s DSO
Improving DSO is essential for businesses to ensure steady cash flow, increase creditworthiness, and pursue growth opportunities. Companies that embrace treasury strategies that include DSO tracking can unlock greater efficiency in their collections process, reduce operational risks, and foster long-term success. As an independent treasury strategist, I can help your company improve your DSO metrics and enhance your cash flow management. Reach out for a consultation today.
