How to Reduce DSO and Build a Healthy Balance Sheet
June 12, 2020 |
With the current reporting period coming to a close, a healthy balance sheet is top-of-mind. Reducing your DSO can improve cash flow, shorten your cash conversion cycle and boost your bottom line.
As the quarter’s end quickly approaches, financial leaders are busy creating reports that highlight their companies’ key performance metrics for stakeholders, investors and peers.
Sufficient cash flow is incredibly important to every company’s success. The amount of available cash your business has on hand at any given time affects daily and long-term operations.
However, creating a strong and cash-flow intensive balance sheet can pose challenges, especially if working capital is tied up in accounts receivable.
Both private and publicly-traded companies face this challenge at the end of every reporting period — whether that scrutiny comes from the government or banking partners — which can make preparing a healthy balance sheet feel like Groundhog Day.
Fortunately, there are ways to disrupt the cycle and improve your company’s quarter-end metrics quickly and easily.
One of the most important metrics to reduce in order to create more cash on your balance sheet is Days Sales Outstanding (DSO), or the number of days it takes accounts receivable to collect cash from outstanding invoices.
In other words, how quickly are your customers paying their invoices, on average?
The importance of DSO’s impact on CCC
The Cash Conversion Cycle (CCC) is a critical part of understanding why a lower DSO benefits your business. CCC, a key metric used to evaluate the efficiency of a company’s operations and management, measures how long it takes to convert investments in inventory and other resources into cash flows from sales.
CCC accounts for:
- How much time your company needs to sell its inventory
- How much time it takes to collect receivables
- How much time you have to pay your bills without incurring penalties
The above stages make up the CCC, expressed as the mathematical formula below:
A high DSO, and one that continues to trend upward, indicates inefficiencies with collecting on receivables, which can lead to a cash flow crunch. Additionally, sending invoices to collections agencies slows the process.
The quicker your business can collect payments on invoices, the shorter your CCC becomes.
Especially now, as many companies extend payment terms to temporarily increase cash to offset the economic effects of the COVID-19 pandemic, suppliers are experiencing a huge spike in DSO. If your customers have extended terms during this uncertain time, you can get back on track by reducing your DSO through C2FO.
If reducing DSO is one of your quarter-end goals, we can help you hit those targets. Early payment through C2FO is a powerful tool you can leverage to shorten your cash conversion cycle and reduce DSO.
The early payment solution
With early payment, you can choose which invoices to accelerate, name your discount and receive payment in as little as 24 hours.
You control how and when you participate, and there’s no interest expense or debt creation. Even if rates on a line of credit are competitive, borrowing cash is often more expensive because of additional fees. Unlike bank programs, C2FO provides a flexible solution that’s secure, reliable and easy-to-use.
In addition, reducing your accounts receivable balance now can actually reduce future lending costs.
With early payment through C2FO, you can lower your DSO by unlocking trapped cash in accounts receivable. It’s an effective way to create more liquidity for your business.
C2FO provides several ways to help your company meet its financial goals. As a financial leader, you have internal and external key performance indicators you need to achieve. If reducing DSO is one of your quarter-end goals, we’re here to help.