How to improve days sales outstanding for better cash flow

Managing cash flow effectively requires a deep understanding of key financial metrics. Among these, days sales outstanding (DSO) stands as a critical indicator of a company's financial health and operational efficiency. For financial leaders seeking to strengthen their cash position, learning how to improve days sales outstanding can lead to significant working capital improvements and more predictable revenue streams.

By exploring proven strategies to reduce DSO and modernize accounts receivable operations, finance teams can achieve faster collections while maintaining strong customer relationships. You'll discover practical approaches to streamline invoicing, optimize payment processes, and enhance collection practices for sustainable business growth.

Read the blog → What is DSO?

Understanding days sales outstanding and its business impact

DSO measures the average number of days it takes a company to collect payment after a sale is made. This metric serves as a vital indicator of how efficiently a business converts credit sales into cash, directly impacting:

• Working capital availability for operational needs.
• Cash flow predictability and management.
• Investment capacity for growth initiatives.
• Overall financial stability and health.

Beyond the numbers, DSO reflects the effectiveness of your entire order-to-cash process. Common challenges that contribute to elevated DSO levels include:

• Manual invoicing processes causing delays.
• Inconsistent payment terms across customer segments.
• Inefficient collections procedures.
• Lack of visibility into payment status.
• Poor communication between departments.

Addressing these fundamental challenges through strategic process improvements and technology adoption can transform your cash flow performance. When finance teams tackle these issues systematically, they create a foundation for sustained DSO improvement that supports long-term business objectives.

Calculating and tracking DSO effectively

To reduce days sales outstanding, you first need to understand your current DSO status and establish clear measurement protocols. The standard formula for calculating DSO is:

(Accounts Receivable / Total Credit Sales) × Number of Days in Period

For example, if your accounts receivable balance is $1 million and credit sales for the quarter were $2 million, your quarterly DSO would be: ($1,000,000 / $2,000,000) × 90 = 45 days

While the formula itself is straightforward, implementing a consistent measurement process requires careful attention to detail. Financial teams should set goals for DSO improvement based on industry benchmarks and company-specific factors to drive meaningful change.

Best practices for DSO measurement include:

• Calculating DSO monthly to identify trends early.
• Segmenting DSO by customer groups or divisions.
• Comparing results against industry benchmarks.
• Tracking seasonal variations that affect the metric.
• Documenting calculation methods for consistency.

Understanding potential calculation errors helps teams maintain accurate tracking. Common pitfalls to avoid include:

• Including non-credit sales in calculations.
• Failing to account for payment terms variations.
• Not considering seasonal business fluctuations.
• Overlooking the impact of billing cycles.

Regular monitoring and analysis of DSO trends provide valuable insights into the effectiveness of your order-to-cash process. By maintaining consistent calculation methods and addressing these common challenges, organizations can build a reliable foundation for ongoing DSO improvement.

Read the blog → Peek into your business’s financial future with cash flow forecasting

Strategic approaches to reduce DSO

Implementing these key strategies can help lower your DSO and improve cash flow predictability:

Streamline invoicing processes

• Generate and deliver invoices immediately after fulfillment.
• Ensure invoice accuracy to prevent disputes.
• Include clear payment terms and instructions.
• Provide multiple invoice delivery options based on customer preferences.

Optimize payment terms

• Review and standardize payment terms across customer segments.
• Align terms with industry standards and business needs.
• Consider customer-specific terms based on credit risk.
• Document and communicate terms changes effectively.

Implement early payment incentives

• Offer strategic discounts for early payment.
• Create volume-based incentive programs.
• Design seasonal promotional payment terms.
• Monitor incentive program effectiveness.

While these strategies form the foundation for DSO reduction, their successful implementation relies on proven technology partners. Billtrust helps organizations execute these approaches seamlessly through intelligent automation and industry expertise.

Read the blog → 3 ways to improve DSO with the order-to-cash process

Modernizing accounts receivable processes

Technology plays a central role in reducing DSO through automated solutions that streamline operations and improve visibility. Modern accounts receivable platforms offer four key areas for process improvement:

Digital invoicing

Modern digital invoicing eliminates traditional paper-based delays and costs. Organizations that switch to electronic invoicing typically see immediate benefits through faster delivery and reduced processing time. Key advantages include:

• Immediate delivery to customers.
• Reduced processing and mailing costs.
• Decreased manual errors and disputes.
• Enhanced tracking and visibility.

Payment channels

Offering diverse payment options meets customers where they are while accelerating collections. When businesses provide flexible payment methods, they remove common barriers to timely payment and improve customer satisfaction. This approach allows customers to pay through their preferred channels while ensuring faster processing and improved cash application accuracy.

Cash application

Machine learning and AI-powered matching capabilities transform the cash application process. These technologies can:

• Match payments to invoices automatically.
• Reduce manual intervention requirements.
• Lower overall processing costs.
• Improve accuracy rates significantly.

Payment tracking

Real-time visibility into payment status empowers finance teams to make data-driven decisions. This enhanced transparency enables proactive collection management and improves cash flow forecasting accuracy. Teams can quickly identify payment trends and address potential issues before they impact working capital.

Embracing modern accounts receivable technology creates a foundation for sustained DSO improvement. Organizations that partner with established fintech providers like Billtrust gain access to proven solutions that accelerate the entire order-to-cash cycle.

Collections management best practices

Effective collections management directly impacts DSO improvement through structured processes and clear communication. Finance teams that excel at collections typically implement the following comprehensive strategies:

• Strategic segmentation: Group customers by risk profiles and payment history to prioritize collection efforts and allocate resources effectively.
• Automated reminders: Deploy systematic payment reminder schedules that maintain consistent communication without overwhelming customers.
• Clear escalation procedures: Establish documented processes for handling overdue accounts, ensuring timely and appropriate follow-up at each stage.
• Professional communication: Maintain courteous yet firm communication channels with customers, documenting all interactions and commitments made.
• Dispute resolution: Address payment disputes promptly with clear procedures and documentation to prevent recurring issues.
• Staff training: Invest in regular training for collections staff to enhance negotiation skills and customer service capabilities.
• Performance tracking: Monitor key metrics like average days delinquent and collection effectiveness index to identify areas for improvement.
• Customer self-service: Provide online portals and tools that allow customers to access account information and make payments easily.

Organizations that implement these collection best practices often see significant improvements in payment timing and customer relationships, creating a stronger foundation for sustainable business growth.

Since 2001, Billtrust has been pioneering innovations in accounts receivable automation, helping over 2,400 customers across 40+ industries reduce DSO and optimize their cash flow. Our AI-powered Payments solution, part of the comprehensive Unified AR Platform, transforms payment acceptance and processing with proven technology that helps organizations get paid faster.

Our DSO reduction capabilities deliver measurable results through:

• Payment acceleration: Process all payment types through a single, integrated platform that enables straight-through processing via our Business Payments Network, reducing payment cycles significantly.
• Strategic payment acceptance: Implement configurable payment rules and automated surcharging capabilities that optimize acceptance costs while maintaining customer satisfaction.
• Digital adoption expertise: Drive faster payments through digital channels with proven conversion strategies and a seamless customer payment experience.
• AI-powered efficiency: Leverage machine learning for intelligent cash application, automated payment matching, and predictive analytics that identify payment trends.
• Unified visibility: Gain real-time insights into payment status and cash flow trends through comprehensive dashboards and reporting.

With demonstrated success in reducing DSO by up to 76% when deploying digital payments, our platform combines cutting-edge technology with deep industry expertise. Our team of 80+ implementation experts, each averaging 20 years of experience, delivers seamless integration with existing financial systems and a rapid return on investment.

Schedule a consultation today to learn how Billtrust's payment solutions can help improve your DSO or explore our Accounts Receivable services.