Finance managers are increasingly challenged by cash flow management due to longer payment terms and overdue customer balances, with a notable rise in concerns about late customer payments from 2023 to 2024.
Tracking and intentionally managing a helpful pair of metrics – namely, days payable outstanding (DPO), which deals with cash outflow, and days sales outstanding (DSO), which deals with inflow and is the focus of this article – equips leaders with a set of levers for achieving optimal liquidity. This proactive approach ensures liquidity and flexibility to adapt to strategic goals and market changes, enhancing overall financial health.
What Is DSO? Days Sales Outstanding (DSO) is a key performance indicator that helps organizations understand how efficiently they collect customer payments. Essentially, it measures the average number of days it takes to convert sales into cash.
Here are some tips to lower your DSO:
- Get Cash More Quickly: There are some tried and true strategies for lowering DSO, and some are now easier to execute – even for small organizations – than ever before. For organizations still taking payments via paper checks and phone calls, facilitating electronic payments is the fastest and easiest way to reduce DSO.
- Consider Your Customer: While process automation and more substantial, transparent payment terms help reduce DSO, they won’t bring in cash from customers who are intentionally delaying payment. Examining the payment histories of major customers and customer industry segments will give you a clearer picture of payment speeds across the customer base.
- The Cash Balancing Act: When managing cash, you want a predictable and stable environment, not peaks and valleys. Ideally, DSO and DPO balance each other out. Ultimately, as all businesses adopt tools to allow online payments, payment friction will presumably subside. As in most business areas, pairing technology with ingenuity and strong interpersonal communication will pave the way for organizations to strike the right balance.
Learn more and explore the average DSO for organizations in APQC’s Days Sales Outstanding: A Critical Lever for Managing Cash Flow.