How to reduce DSO: 12 practical steps that work

The DSO formula

DSO = (Accounts receivable ÷ Credit sales for the period) × Number of days in the period

Example: receivables of ₹3 crore, credit sales of ₹2 crore last month (30 days). DSO = 3 ÷ 2 × 30 = 45 days. Try it with your own numbers in the free DSO calculator.

Look at DSO next to two other measures, so you know whether the problem is your terms or your follow-up:

• Best possible DSO = (Current, not-yet-due AR ÷ Credit sales) × Days. This is the DSO you would have if every customer paid exactly on time.
• Average days delinquent (ADD) = DSO − Best possible DSO. This is the part caused by late payment, and the part collections can fix.

What is a good DSO?

It depends on your payment terms and industry. A business on 30-day terms with a DSO of 38 is in good shape; the same DSO on 7-day terms is a warning. Compare DSO with your average terms, track the trend month by month, and watch ADD more closely than the headline number.

12 steps to reduce DSO

Before the invoice

1. Set a written credit policy. Credit limits, terms by customer segment, and who can approve exceptions.
2. Check credit before releasing orders. Hold or escalate orders for customers above limit or with 90+ day balances.
3. Agree terms clearly. Payment terms, PO requirements and billing contacts on every contract and order.

The invoice itself

4. Bill on time. Every day of billing delay is a day added to DSO. Track "delivery to invoice" days.
5. Bill right the first time. Correct PO, price, quantity, GST details and supporting documents. Most disputes start here.
6. Send to the right person. Keep an accounts payable contact for every customer, not just a sales contact.

Collections

7. Call before the due date. A short courtesy reminder for large invoices catches problems while there is still time.
8. Prioritise by value and risk. Each morning, work the biggest and oldest balances first, not the alphabet.
9. Get a real promise-to-pay. Amount, date and person, confirmed in writing. See my promise-to-pay email templates.
10. Escalate on a schedule. A clear ladder: collector, team lead, finance head, sales leader, credit hold.

Disputes and cash

11. Own every dispute. Log it, assign an owner outside AR where needed, and track days to resolve. Fix the top three root causes each quarter.
12. Apply cash fast. Unapplied cash hides what is really overdue and wastes collectors' time on invoices already paid.

Indian context worth knowing

• MSME buyers and suppliers: under the MSMED Act, payments to registered micro and small enterprises are due within the agreed period, capped at 45 days. Since FY 2023-24, Section 43B(h) of the Income Tax Act allows buyers a deduction for such dues only when paid within that time. If you are an MSME supplier, mention this politely in your follow-ups.
• GST details: wrong GSTIN, place of supply or e-invoice data is a common reason for a customer to hold payment. Check these at billing.

Where to start this week

Run your ageing, pick the 20 customers with the largest overdue balances, and call each one with a specific question: "What do you need from us to release payment for invoice X?" You will learn more about your DSO in one week of those calls than in a month of reports. If you want help, my ageing strategy tool turns your ageing file into a prioritised collection plan in minutes.