7 Strategies to Reduce DSO & Improve Cashflow

Days Sales Outstanding (DSO) is a measure for how long it takes a company to collect on an invoice. And after years of supplier shortages, drastic demand fluctuations, increased operating costs and liquidity pinches, Finance leaders are prioritizing goals associated with reaching the lowest DSO possible and quickly recovering payment on accounts receivable (AR). The goal is to reduce DSO to have the lowest DSO possible and quickly recover payment on AR. A high DSO value means it takes a company a lot longer to collect and could lead to cashflow problems due to the longer time between the sale and the time the payment is received.

DSO is calculated using the following formula (also known as the DSO ratio):

DSO = (AR balance / Credit sales) x Number of days in that period

For example, if your net credit sales (sales that aren’t paid immediately) are $950,000 and your AR balance is $125,000 for a year-long period, it takes you an average of 48 days to collect from your customers. If you have 30-day payment terms, this number means you need to speed up the rate at which you receive payment.

DSO = ($125,000 / $950,000) × 365 days = 48

A high DSO has a tremendous impact on cashflow and revenue and can prohibit you from investing in your company’s growth. Reducing DSO, even slightly, can go a long way toward improving financial health. There are several strategies to reduce DSO and improve an organization’s cashflow, as well as a list of questions to consider below.

How to reduce DSO in your organization: 7 Strategies to reduce DSO and improve cashflow

Make it easier for your customer to do business with you

Offering multiple payment methods — such as credit cards and automatic payments, or an online option for customers to view invoices and statements — provides greater flexibility for the customer and improved cashflow for you. Are you making it easy for your customers to pay and communicate with you? Using tools like Esker, you can provide a self-service payment dashboard where customers can view invoices, statements, and payment status. Making payments easier for customers drives faster payment cycles and supports your DSO reduction goals.

Tighten credit approval processes

Are you performing credit evaluations on all new customers? Are your credit terms appropriate and followed by your sales department? Does your customer service department flag new orders that do not have a completed credit app? Do you have a procedure in place for updating credit information on a regular basis?

Evaluate every new customer’s creditworthiness before extending terms. Require completed credit applications, perform background and financial checks, and set credit limits tailored to risk. Regularly review and update customer credit profiles to respond to changing financial conditions. Strong credit governance limits exposure to delinquent customers and supports your DSO improvement efforts.

Evaluate your invoicing and e-invoicing processes

Are your invoices accurate and sent out on time? Are payment terms and due dates clearly written on invoices and any other communication sent out to the customer? Have billing addresses and accounts payable email addresses verified before bills are sent out? Do you provide incentives for early pay? Are you sending out automated payment reminders?

Validate billing and AP contact information before dispatching invoices. Incorporate automated reminders and consider offering small incentives for early payment. Getting the invoicing process right is fundamental to reducing DSO. 

Need help improving your invoicing processes? Esker's Invoice Delivery Software can help automate your invoice delivery process.

Accounts receivable management strategy

Do you consistently follow up on customer disputes and late payments? Are you measuring your AR performance against industry benchmarks? Do you regularly review aging reports? Are you reporting on collections forecasting? Do you have an understanding as to why customers are paying late (e.g., invoice discrepancies, product issues, etc.)?

Monitor accounts receivable daily, flag aging invoices, and analyze patterns of late paying customers. Track collections performance against targets and forecast expected cash inflows. By actively managing receivables, you gain early visibility into payment slippage and maintain momentum on DSO improvement.

Improve collections processes

Do you have a collections process in place? Do employees have the tools they need to prioritize, call and email collection efforts? Do collections specialists have enough time to follow up on all past-due accounts? Are they able to efficiently keep sales and customer service in the loop on disputed invoices?

Create a defined collections workflow with prioritized call and email sequences, escalation rules, and deadlines. Equip your collections team with tools (scripts, reminders, dispute-tracking) and training in negotiation and dispute resolution. Involve sales or customer service when disputes arise. A consistent, aggressive collections cadence helps push overdue invoices toward payment and accelerates your DSO reduction.

Esker's Collections Management Software helps optimize your processes with AI-driven payment predictions and recommendations, as well as cross-department collaborative tools. AI-automation in collections processes can eliminate many manual processes- leaving your collections team available for value-added tasks.

Offer payment incentives to customers

Are you offering discounts? Do you offer incentives to customers to receive quicker payments, such as early payment discounts? 

Provide discounts or rewards to customers who pay early — for example, 1–2% off if they pay within 7–10 days on net-30 terms. Alternatively, offer tiered incentives, or value-added services in exchange for prompt payment. Incentives create urgency and shift customer behavior toward paying sooner, helping to lower your average days sales outstanding.

Customer purge

No one wants to walk away from a customer, but do you know which customers are routinely inconsistent, unresponsive or continually paying invoices late despite offering outstanding services? Identify customers who regularly pay late, dispute invoices, or neglect communication. Engage with them to understand underlying issues, then decide whether to renegotiate terms, demand stricter payment methods, or — in the worst cases — terminate the relationship. DSO increases are often driven by a few large customers. Has your collection staff worked closely with those customers to understand what is driving the slippage?

Improving DSO to optimize cashflow

Improving DSO is imperative to cash management; however, there are two sides to the cashflow coin: AR and AP. Both play equally integral parts in establishing cashflow, and when it comes to improving it, addressing only one of these processes simply isn’t enough to create real change. The only way to do that is by strengthening both muscles: the one bringing cash in (AR) and the one sending cash out (AP).

On the flipside of DSO is DPO (Days Payable Outstanding), and like DSO it can pack a major punch when it comes to cashflow performance. DPO can also be the determining factor between suppliers considering your company a “good client” or a “bad client”. There’s currently no benchmark for a “healthy” DPO due to the variability of industry, competitive positioning and bargaining power of organizations. That’s why keeping a close eye on your DPO and your competitors’ DPO is important for gauging your payables performance.

Addressing both sides of the cashflow coin

Automating just one side of the cashflow equation can actually create new inefficiencies. Because AR and AP processes are inextricably intertwined, automating just one can result in departmental silos and ultimately hinder your ability to optimize working capital.

The secret to a better DSO and DPO is automating both AR and AP through a single interface that simplifies and standardizes you organization’s finance function as a whole. Want to learn more about end-to-end financial transformation? Check out this ebook!