How Reducing DSO Frees Up Cash for Your Business
Payment terms and collection timelines directly influence your cash flow. Extended credit terms (e.g. Net 30 or Net 60) mean waiting longer to get paid, which increases Days Sales Outstanding and ties up cash in receivables.
The Role of Accounts Receivable and DSO
One of the biggest factors influencing your cash on hand is accounts receivable – the money customers owe you. When you sell products or services on credit (i.e. your customers don’t pay immediately), those sales turn into accounts receivable on your balance sheet until the cash is collected. If too much money is tied up in receivables for too long, your liquidity suffers because that cash isn’t in your bank yet.
This is where Days Sales Outstanding (DSO) comes in. DSO is a metric that tells you the average number of days it takes your customers to pay their invoices. Put simply, DSO measures how quickly your credit sales turn into cash. A low DSO is good – it means customers pay quickly, so cash is coming in fast. A high DSO is bad news – it means slow collections, so cash is coming in slowly, which can threaten your company’s liquidity. In fact, the longer your DSO, the more cash gets “trapped” in accounts receivable instead of being available to use.
How DSO Reduction Improves Liquidity
Improving DSO means getting paid faster. Even a small reduction in DSO – by a few days – can free up a substantial amount of cash for your business. This boosts your working capital and liquidity without needing to increase sales or cut expenses. Essentially, you’re unlocking money that’s already earned but stuck in transit.
We can quantify the effect easily. Every day you reduce DSO is like freeing up one day’s worth of sales in cash. The formula to estimate the cash impact is:
Cash Freed = ΔDSO × (Annual Credit Sales ÷ 365)
This formula multiplies the decrease in DSO (ΔDSO, in days) by your average sales per day (annual credit sales divided by 365). The result is the amount of cash unlocked by collecting that many days faster.
Example: Let’s say your company has $20 million in annual credit sales. Originally, customers take an average of 65 days to pay (DSO = 65 days). If you manage to streamline collections and bring DSO down to 60 days, that’s a 5-day improvement. Your average daily credit sales are about $20,000,000 ÷ 365 ≈ $54,800 per day. Multiply that by the 5-day reduction, and you free up roughly 5 × $54,800 ≈ $274,000 in cash. That’s a quarter-million dollars made available simply by getting paid a little sooner!
Small Changes, Big Impact
The example above makes it clear that small changes in DSO can have a big impact. Even a 1-day improvement means one extra day’s worth of sales is available as cash for you to use. Depending on your sales volume, that could be thousands or even hundreds of thousands of dollars freed.
From a practical standpoint, this is why credit and accounts receivable teams focus so much on invoice management, credit terms, and collections efficiency. By sending invoices promptly, enforcing payment terms, and working with customers to resolve payment delays, you can chip away at your DSO. Each day reduction directly translates into extra cash for the business. It’s one of the most direct ways a credit/AR team can improve company finances without increasing sales.
(To make it easier to visualize the effect of DSO changes, we made a free tool where you can input your own numbers to see the impact on your business)
Conclusion
Working capital might sound like financial jargon, but at its core it’s about keeping enough cash flowing to run and grow your business. Days Sales Outstanding (DSO) is a key lever in that equation – it gauges how long your cash is tied up after a sale. By focusing on reducing DSO, even incrementally, businesses can free up significant cash, improve their liquidity, and strengthen their financial health.