How should I manage Days Sales Outstanding to strengthen cash flow?

Question

AcadiFi · Accepted Answer

Days Sales Outstanding equals 365 * (Accounts Receivable / Revenue). It measures average collection time. Rising DSO consumes cash, reduces liquidity, and signals deteriorating customer quality or collection discipline.

Effective tactics fall into three buckets: credit policy, billing operations, and collections.

Credit policy: run credit checks on every new customer through bureaus or trade-credit agencies. Set credit limits proportional to customer financial strength. Require deposits or shorter terms for new or weak accounts. Update credit reviews quarterly for top exposures, annually otherwise. Require personal guarantees for private-company accounts above materiality thresholds.

Billing operations: invoice electronically at the moment of delivery, not weekly batches. Ensure invoices are complete and accurate (30% of late payments stem from invoice disputes). Use standardized formats that customers' accounts-payable systems can ingest without manual intervention. Offer digital payment options: ACH, wire, and credit card (factoring in interchange fees).

Collections: establish a cadence of contact at 1, 15, 30, and 45 days past due, escalating from friendly email to CFO-to-CFO call. Train collectors to distinguish disputes from stalling. Offer structured payment plans before escalating to legal action. Deploy prompt-payment discounts selectively for high-DSO customers: 1/10 net 30 has an implicit cost of 18%, so reserve for genuinely slow payers.

Imagine Amalia Stronach at Kendrick Precision. DSO rose as large OEM customers extended their own payables. She negotiates early-pay discounts with three accounts, moves to weekly invoicing, and hires a dedicated collections specialist. DSO drops from 52 to 41, freeing $9.2M cash.

Measure weekly. Publish a DSO dashboard to operations leadership to maintain discipline.

How should I manage Days Sales Outstanding to strengthen cash flow?

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