How to Reduce DSO in Your Business

The benefits for reducing DSO are valuable—saving time and money to be invested back into the business.


Every accounts receivable team within a B2B company understands the importance of lowering their DSO. And now, you have key insights into actionable steps to make reductions in your own company to accelerate cash flow and alleviate any dependence on revolving lines of credit. The benefits for reducing DSO are valuable—saving time and money to be invested back into the business.

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Low DSO is incredibly important for any B2B company. Because time is money, the longer a business has to wait to be paid, the more money they are losing. Reducing DSO frees up time, energy and investment capital that can be reallocated toward core business functions to grow the company. Companies with lower DSO have more cash flow at their disposal while businesses with higher DSO tend to have more clients on extended payment terms, referred to as credit sales.

Calculating DSO

As an industry standard measuring stick for AR professionals within B2B companies, DSO is calculated by dividing the amount of accounts receivables during a given period by the total value of credit sales during the same period and multiplying the result by the number of days in the period measured, as illustrated in the graphic below.


Making the Most of Your Numbers

DSO is looked at on a monthly, quarterly and annual basis. The number shouldn’t fluctuate very often, but if it increases drastically, you should definitely do further research. If it decreases too much, perhaps it is time adjust the invoice terms, make sure customers are satisfied and that the company isn’t letting those with poor credit make purchases, or large purchases quickly without establishing themselves with the company first. If they don’t pay and their invoice is written off, that will negatively affect the DSO. At the end of the day, the lower the number of days sales outstanding (DSO), the better off your business is. Here are several ways to do that:

 

  • Increase credit card acceptance early in the billing cycle.
  • Automate your billing process.
  • Outline customer payment responsibilities.
  • Detail invoicing processes.
  • Include credit card payment options on every invoice, statement and dunning letter.
  • Offer incentives for early payments and late fee penalties.
  • Don’t be afraid to get rid of bad customers.

Every accounts receivable team within a B2B company understands the importance of lowering their DSO. And now, you have key insights into actionable steps to make reductions in your own company to accelerate cash flow and alleviate any dependence on revolving lines of credit. The benefits for reducing DSO are valuable—saving time and money to be invested back into the business.

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