Four Tips for Improving Day Sales Outstanding (DSO)

By Molly Pryor

A company’s ability to create value for shareholders is fundamentally determined by its ability to generate positive cash flows, or, more specifically, to maximize long-term free cash flow (FCF). Cash flow refers to the net balance of cash moving into and out of a business at a specific point in time. FCF is the cash generated by a company from its normal business operations after subtracting capital expenditures.

Day Sales Outstanding (DSO) is a metric to measure how healthy your company’s cash flow is. DSO is the average number of days it takes a company to collect payment for a sale, and it’s a key performance indicator of liquidity and overall well-being. The lower the DSO, the better the health of your business.

If your company’s cash flow could use some improvement and your DSO is high, consider the following:

• Does your company’s billing and invoicing process need to be optimized?
• How long does it take for an invoice to reach a customer?

A high DSO compared to contractual terms indicates that clients are taking longer to pay or that your collection process is inefficient. By implementing effective accounts receivable strategies, businesses can reduce their DSO and improve their financial position.

Lessons from the Trenches: Four Critical Steps to Improve DSO

When it comes to improving DSO, digitizing your accounts receivable and collections processes is a great first step to getting you on the right track to strengthening your cash flow. Here are four critical steps to help lower DSO:

• Use Digital invoicing

Slow, inefficient, error-prone manual invoice processing, reliant on lengthy paper trails and snail mail, is one thing that may cause a business to suffer from high DSO. By shifting to electronic invoicing, invoices are delivered directly to a customer’s email address.

An all-digital, self-service portal can lead to quicker payments. Transactions are executed within that portal, and customers can use their preferred payment method, making the process quick and convenient for all.

• Enhance Collections Practices

A business should have a clearly defined debt recovery process for higher-risk credit customers. Responding consistently to them is one key to collection success. Send notices, follow-ups, and other alerts to your customers using an automated communication tool from within the portal. This can increase the speed of repayment. Other ideas include incentivizing early payments by modifying your payment terms, offering discounts, or enforcing heftier late fees for delinquent customers.

• Strengthen Credit Evaluations

Businesses can lower DSO by performing consistent and thorough credit evaluations on new, current, and slow-paying customers. Customers should also be on a periodic review cycle.

An automated credit management software platform integrates seamlessly with various credit bureaus and agencies, gleaning the most data-driven insights about customers. Then, robust monitoring and reporting tools deliver real-time alerts and updates regarding late payments and other problematic issues, keeping users informed while mitigating risk every step of the way.

• Evaluate Contracts and Optimize Payment terms.

Expert contract management not only simplifies cash flow management for financial optimization but also creates financial and operational efficiency, reinforces the way teams operate, and streamlines procedures, contributing to consistent and predictable cash flow.

"Aligning contracts with the organization's revenue stream and business objectives ensures that businesses are not only prioritizing cost reduction but also increasing revenue, improving profitability, and achieving long-term success," states Kristi Chickering, the CEO of Sirius Solutions

One way to optimize payment terms is by adopting electronic invoicing and payment systems. These systems help automate and streamline the payment process, from generating invoices to receiving payments, reducing the risk of errors and delays. They also provide real-time visibility into payment statuses, allowing finance leaders to monitor cash flow and plan accordingly.

In essence, improving DSO involves a combination of digitization, effective collection practices, robust credit evaluations, and optimized payment terms. Drawing from our successful engagement with our clients, these steps not only lower DSO but can also enhance the company's financial position and ability to generate value for shareholders.

Digital Transformation of Accounts Receivable

Success Story #1 - Our work with a client facing challenges in their scalable Order-to-Cash process serves as a powerful example.

The Challenge: Increasing DSO. Our client's DSO exceeded 110 days and was expanding monthly, so they needed to quickly assess their Order-to-Cash process and boost receivables collections. This was integral to their growth plans through acquisitions with a scalable Order-to-Cash process.

The Impact: Significantly Reduced DSO and Standardized Processes. In the case of our client, Sirius Solutions standardized and optimized their OTC processes, delivering impactful results.

• DSO was reduced by 25 days
• This reflected an immediate 23% improvement
• The initiative was completed within 12 weeks
• By documenting procedures and teaching their workforce the new processes, we equipped our client with tools for future process improvements

By assembling a multi-disciplined team with expertise in treasury, project management, internal controls, process optimization, and management reporting, Sirius Solutions identified and addressed the fundamental reasons for the excessive DSO.

Here is another example of managing Day Sales Outstanding (DSO) efficiently leading to improved cash flow and overall financial health.

Success Story #2 - Our client, a multinational chemical company, confronted their DSO challenges head-on, embracing a digital transformation to overhaul their accounts receivable processes. This led to significant improvements in their DSO, increasing working capital, and streamlining operations across the globe.

The Challenge: High Overdue Accounts and Manual Processes. Our client faced a high number of overdue accounts in its receivables, leading to an inflated DSO. Their goal was to streamline and integrate their global Order-to-Cash (OTC) processes across four SAP platforms covering North/South America, EMEA, and APAC. They required capabilities for sending dunning letters with invoices, incorporating credit scoring models, and coordinating deduction management across departments.

Despite utilizing an automated collection workflow tool, only 50% of trade receivables were being captured. Most processes, including correspondence, deductions management, and credit assessments, were manually executed. This lack of automation not only increased their DSO but also hindered visibility and control over the collections process.

The Impact: Improved DSO and Increased Working Capital.

• Implementing a combination of the critical steps outlined above to improve DSO led to impressive results. A $1mm investment was made for the implementation of a more holistic and comprehensive credit, collections, and dispute automation solution. This effort centralized and standardized global processes and achieved a single source of information, drastically improving visibility.
• Our client's working capital increased by $30MM, and A/R overdue was halved to 4% from 8%. Their DSO decreased to 42 from 53 days, and productivity increased five-fold for collections. Deduction resolutions were reduced to less than ten days from over 60 days.
• Furthermore, the time taken to conduct credit reviews decreased by a staggering 96%.

This success story underscores the transformative power of digitizing accounts receivable processes, reinforcing the importance of the four critical steps to improve DSO, leading to increased efficiency, cash flow, and profitability.

About the Author: Molly Pryor is Director, Credit & Treasury Transformation Solutions at Sirius Solutions, L.L.L.P. She has 30+ years of Credit Risk Management and Treasury leadership experience as a Senior Director at Huntsman Corporation, and is also experienced in risk management, due diligence and system development and implementations during her time at Dynegy, Enron, and Merrill Lynch. She can be reached at MPryor@sirsol.com or 713.377.3992.

Sirius Solutions is a professional services firm focused on improving the operational and financial performance of our clients. Since 1998, they have been a game changer in 30+ industries and 40+ countries by using a dynamic deployment model designed to eliminate idle resources and unnecessary spend. Sirius specializes in: Improving Economic Performance | Solving Complex Business Issues | Business Event Execution | Operational Transformation.