Optimizing Receivables Means More Than Managing DSO

Of all the things a business needs, cash on hand is top of the list.

And against today’s dynamic operational backdrop, financial health and operational efficiency can be defined by a three-letter metric: DSO, or days sales outstanding. DSO measures the average number of days a company takes to collect payment after a sale, and high DSO can indicate inefficiencies in the collection process, potentially leading to cash flow issues.

“We’ve seen a growing emphasis on the need for DSO management,” Steve Smith, global director for strategic projects at Esker, told PYMNTS, noting that rising inflation and fluctuating interest rates have driven companies to pay greater attention to DSO management as a key lever in ensuring business liquidity.

Reducing DSO is not merely about improving the bottom line — it impacts growth, operational efficiency and even employee satisfaction.

However, one of the biggest hurdles companies face in reducing DSO, according to Smith, is ensuring that the entire organization — from top leadership down — understands its importance.

“Without top-down buy-in, DSO management falls through the cracks because it’s not the responsibility of just one department,” Smith said, noting that reducing DSO requires collaboration across multiple areas, including sales, finance and customer success.

Leaders must first establish that improving DSO is a priority and align all departments on the mission. “Collections teams, for example, rely on timely and accurate information from sales and finance to effectively manage receivables,” Smith said. When leadership creates a unified focus on reducing DSO, it becomes easier to implement the necessary technologies and process changes.

And once those changes are in place, a whole new world of business benefits can be unlocked.

Unlocking Cash Flow, Credit and Growth

Reducing DSO isn’t just about managing receivables; it’s about creating a stronger, more resilient business. Innovative tools, like automation and artificial intelligence (AI) are increasingly being leveraged and transforming how businesses approach their accounts receivable (AR) function.

“AI can analyze historical data, identify patterns, and help businesses make more informed decisions,” Smith said. And the benefits of AI and automation go beyond decision-making — they can streamline the entire receivables process.

After all, one of the simplest ways to improve DSO is by accelerating invoicing. “We still see companies sending out invoices once or twice a month,” Smith said. Automating this process to issue invoices as soon as a sale is finalized shortens the time it takes to start the collection cycle, thus improving cash flow. AI-powered tools can also monitor customer creditworthiness, automate payment reminders and even assist in resolving disputes — areas that are traditionally time-consuming for staff.

For instance, dispute management is often a hidden drain on company resources. Disputes can arise for various reasons, including pricing discrepancies or miscommunication between sales and the customer. “AI is making strong strides in helping to quickly identify the source of disputes, whether it’s the customer or the company at fault, and resolving them efficiently,” Smith said.

Reducing DSO not only frees up working capital for day-to-day operations, but also positions a business for growth. “When you have more cash on hand, it not only improves your ability to cover operational costs, like payroll, but it also increases your creditworthiness,” Smith said.

With better access to credit, businesses can pursue mergers and acquisitions (M&A), invest in expansion opportunities, and even secure more favorable financing terms.

However, access to capital is still complex, even with inflation easing. This makes it all the more critical for companies to maintain positive cash flow. A strong cash position can be the differentiating factor between a company that thrives and one that struggles to grow.

Key Performance Indicators for Effective DSO Management

To ensure progress in DSO reduction, companies must track relevant performance metrics. According to Smith, the collections effectiveness index (CEI) is one of the most critical key performance indicators (KPIs), as it measures how much cash is collected in a given time frame. Other key metrics include:

Bad debt-to-sales ratio: Identifying customers or industries with a higher likelihood of bad debt helps in mitigating future risks.

Average collection period: Monitoring how long it takes to collect from different customer segments allows businesses to prioritize high-risk accounts.

Root cause analysis: Understanding why certain payments are delayed, whether due to internal inefficiencies or customer challenges, is crucial for developing effective solutions.

Credit risk management is also important.  “Some companies are so eager to win business that they don’t evaluate the creditworthiness of their customers,” Smith said. This makes collections difficult, as these customers may have a poor track record of paying on time. By incorporating more robust credit checks and offering early payment discounts, companies can incentivize timely payments while minimizing risk.

Smith shared several success stories of companies that have significantly reduced their DSO through automation. Trek Bikes, a globally recognized brand, faced the challenge of managing collections across different countries with varying payment practices. By automating routine tasks and reducing manual work, Trek was able to boost staff satisfaction and improve its collections process. That also enhanced transparency, which led to fewer disputes and better customer relationships.

Similarly, Connor Sport Court, a leader in sports flooring, saw a 30% reduction in DSO after implementing Esker’s solutions. “They improved their decision-making around credit and were able to manage disputes more effectively,” Smith said. One of the key drivers of their success was offering customers a seamless payment experience via an automated portal, which increased on-time payments by 50%.

Looking ahead, Smith emphasized the need for companies to first refine their processes before implementing new technologies. “You don’t want to automate a bad process,” he said. Ensuring that internal operations are streamlined is the first step toward reaping the benefits of automation and AI.

As Smith put it, “When the company is healthy, it’s good for everyone — from employees to shareholders.”