DSO (days sales outstanding) is a key cash management indicator used to assess how efficiently your business collects payments and debts. 

But what exactly is DSO? Why is it important to monitor it, and how can you optimize this metric effectively? Let’s start with a concise definition.

What is DSO?

DSO measures the average time it takes a company to convert sales booked into cash. In other words, it indicates the average time between issuing an invoice and collecting payment from the customer. 

This KPI (“key performance indicator”) is useful for assessing the financial health of an organisation, and in particular your ability to maintain positive cash flow.

A high (or long) DSO may indicate collection problems or overly generous credit policies. Conversely, a low DSO reflects effective management of trade receivables, which is essential for maintaining a healthy cash position.

Why is DSO important?

Days sales outstanding is one of the three key elements of the cash conversion cycle (CCC), along with DIO (days inventory outstanding) and DPO (days payable outstanding). Together, these indicators show how long it takes a company to convert its resources into cash.

A short DSO has several advantages:

• Improved cash flow: rapid collection of receivables reduces the need for external financing and keeps you financially resilient.
  
  
• Reduced risk: unpaid invoices increase the risk of bad debts. By speeding up payments, you minimize this risk.
  
  
• Greater flexibility: improved liquidity gives you more room to invest, innovate or respond to unforeseen circumstances.

More than just a figure, DSO reflects the overall efficiency of your company's internal processes, particularly those relating to customer relations and financial management. By monitoring this indicator, you can identify areas for improvement in your commercial and financial practices.

How to calculate DSO

The DSO calculation follows a simple formula:

DSO = (Trade receivables / Credit sales) × Number of days

• Trade receivables: Total amounts owed by customers on a given date (available in the balance sheet).
• Credit sales: Amount of sales made on credit over a given period (often monthly or quarterly).
• Number of days: Length of the analysis period (generally 30 days for a month, 90 days for a quarter).

Example: A company has trade receivables of €50,000 and credit sales of €200,000 over a quarter. The DSO is calculated as follows:

DSO = (50,000 / 200,000) × 90 = 22.5 days

This means that the company takes an average of 22.5 days to collect its receivables. This result can be used as a benchmark to assess whether improvements are needed, or whether the processes in place are already efficient.

How can you optimize DSO?

To reduce DSO, it is essential to improve billing and collection processes while balancing the customer relationship. Here are some key strategies:

1. Optimize invoicing

Send invoices quickly and without errors. A late invoice will almost certainly lead to late payment. So use automated invoicing tools to save time and reduce errors, especially if you have a high number of customers.

Make sure that payment terms (deadlines, methods) are clearly defined and accepted from the outset. Transparent communication limits misunderstandings.

2. Improve payment tracking

Set up automatic reminders for outstanding invoices. Use receivables management software to give you a clear view of future payments and anticipate any delays.

Segment your customers to identify those at high risk of late payment, and adopt personalized approaches for them.

3. Reduce the risk of bad debts

Analyze the creditworthiness of customers before offering credit. This may include checking their financial history or using risk assessment tools. 

Offer incentives for early payment, such as discounts. A customer who receives even a 2% discount if they pay within 10 days may be more motivated to do so.

Give preference to payment on order or in cash for new customers, especially those whose creditworthiness has not yet been checked.

4. Renegotiate payment terms

If your DSO is high, consider talking to customers about shortening payment terms. Offering more flexible payment options, such as payment plans, can also help to improve terms while maintaining a healthy business relationship.

5. Regularly monitor and analyse DSO

Regular DSO monitoring lets you quickly identify anomalies or alarming trends. Use dashboards to monitor this indicator in real time. Compare your results with those of your sector of activity to assess your performance.

The tech solutions that help to optimize DSO

New technological solutions play a decisive role in improving receivables management:

• Receivables management solutions: these applications automate the invoicing and payment tracking processes, freeing up time for administrative teams.
  
  
• Banking integration: open banking solutions provide better visibility of cash flows and facilitate payments. Bank reconciliations are also simplified.
  
  
• Predictive analysis: some tools use artificial intelligence to predict late payments on the basis of past habits, and propose appropriate corrective action.
  
  
• Automated reminders: modern technologies make it possible to programme automatic reminders, personalized according to the customer's profile and the amount owed.

DSO in a nutshell

DSO reflects a company's financial performance when it comes to debt collection. Reducing payment delays requires the adoption of targeted strategies and the use of effective tools. 

Integrated into an overall analysis of the cash conversion cycle, it helps to strengthen financial management, mitigate risk and support future investment.

By following this advice, companies can not only improve their cash flow, but also lay a solid foundation for sustainable growth. A well-mastered DSO is not only an indicator of financial health, it is also a strategic asset for standing out in a competitive environment.