DSO - Significantly optimising cash flow by changing the focus - mini-series (Part 3)
This is the final post in the three-part series on cash flow optimisation in manufacturing and FMCG companies. Part 1 covered inventory and Days on Hand. Part 2 covered supplier payments and DPO. Here we close with customer payments - Days Sales Outstanding, or DSO.
The series argument remains the same throughout: finance must report on cash flow, but operations must own the metrics.
A story that illustrates the problem better than any framework
Consider a hypothetical company - let's call it Pompous Inc. - where you hold the position of Head of Supply Chain and Procurement. The company faces a recurring cash flow shortage at the end of each second and fourth quarter. The managing board does not treat cash flow as a process; they treat it as a situational emergency. So every quarter-end, you find yourself summoned to a crisis meeting led by the CFO, along with the heads of Manufacturing and Sales, to devise short-term strategies to accelerate cash.
Sales is asked to chase overdues. In the corridor outside the meeting, the Sales Head pulls you aside: her revenue numbers are due in a few weeks. If she aggressively pursues payment from the best customers, she risks the relationships. She is incentivised on revenue, not cash, so she plans to go through the motions without meaningful action.
Manufacturing is asked to convert work-in-progress and finished goods inventory into billable sales. The Manufacturing Head is cooperative but honest: pushing hot lots manually outside the MES will delay other planned orders. He will need to approve ten percent more overtime for the next few weeks to compensate, which squeezes the margin on the subsequent batches. Not a great trade either.
As Head of Procurement, your task is to identify supplier payments due before quarter-end that Accounts Payable could safely push into the next quarter. You work through the Pareto analysis. Almost all can be delayed - except two.
Supplier A you feel obliged to. Their sales head has come through for you in difficult situations before, and you consider yourself a preferred customer.
Supplier B you will not touch. Last year, you tried delaying their payment once. The day after it was due, you received a call - not an email, a call - from their Head of Accounts Receivable. She told you, without hostility but without ambiguity, that you were in breach of contract and that her internal policy required her to impose a delivery moratorium until payment cleared. Nothing personal, she said, with a half smile you could almost hear through the phone. Within the hour, calls from your own plants began arriving - Supplier B had notified them directly that shipments were on hold due to a commercial issue in Procurement and Accounts Payable. That evening, you received a call from your own COO asking what on earth was happening. You called Accounts Payable, the payment went through that night, and the next morning you called Supplier B's Accounts Receivable Head back and explained it had all been a systems glitch.
It had not been a systems glitch. And Supplier B knew it. And so did you.
What this story illustrates, beyond its entertainment value, is that situational cash flow management creates havoc throughout the entire value chain. It also demonstrates something important about DSO specifically: the cash is squandered not primarily because customers refuse to pay, but because the company's own processes, incentives, and role assignments make it easy for cash to slip away.
Where DSO is lost
The most common failure modes across the companies I have worked with are consistent and recognisable. Invoices are sent late - after delivery rather than at or before it. Customers who do not feel like preferred partners do not prioritise paying you on time. Overdues are managed by Sales, who are incentivised on revenue and have every reason to be gentle, rather than by Accounts Receivable, who are structurally positioned to be firm. Payment terms in customer contracts are not standard and not monitored. Contractually agreed terms are not followed up systematically and drift into overdues without consequence. Local market benchmarks for payment norms are unknown. Sales staff are neither trained in cash flow management nor incentivised for it. And milestone payments - which are highly effective in project or long-cycle businesses - are either not negotiated or not executed.
Eight questions to assess the current state
Are Cash Conversion Cycle metrics linked to the compensation of management and sales?
Has guidance to sales on acceptable payment terms been updated in the last five years, in light of the significant interest rate changes that have occurred across global markets?
Do you have maximum payment term thresholds for sales contracts, and are they automatically monitored in your CRM or ERP?
Do your salespeople understand and actively promote the cash flow benefits of pre-payments and milestone structures?
Do you measure the gap between contractually agreed payment terms and actual receipt of payment through Accounts Receivable?
Is cash collection managed by Accounts Receivable rather than by Sales?
Do you have systematic overdue reporting with time-based escalation paths?
Do you track on-time delivery performance in the context of DSO, with consequence management linked to it?
A clear yes to most of those means DSO is under reasonable control. If most are no or unclear, the cash opportunity is significant - and the calculation is straightforward.
Calculating the size of the prize
Divide your total annual revenue by 365. That gives you your DSO cash flow per day.
Set a target average DSO. Depending on your customer base and sales model, a well-run operation targets anywhere from negative - achieved through pre-payment or milestone structures - to 60 days. Subtract your current DSO from your target, and multiply by the daily figure.
For a company with USD 10 billion of revenue, a disciplined DSO improvement programme where there has been limited focus before can generate USD 400 to 800 million of additional cash in less than a year. The range reflects starting point variability - companies with poor overdue management and no systematic collection process are at the higher end of the opportunity.
Setting up the programme
The timeline is six months - the shortest of the three cash flow programmes, because the levers are primarily contractual and process-based rather than structural. The board sponsor is the COO if sales reports into that function, or the CFO otherwise. The lead is shared between the Head of Sales or Business Unit Head and the Head of Accounting - a joint target, as in the DPO programme, is essential to prevent the functions from optimising against each other.
Weekly task force, monthly board-level reporting with clean output metrics: DSO trend, overdue development, number of contracts with aligned payment terms, revenue and country coverage as a percentage. Roles and responsibilities between Sales and Accounts Receivable must be made explicit from day one - the Supplier B story illustrates why the ambiguity is so costly.
Training matters here more than in the inventory or DPO programmes, because the resistance is partly cultural. Sales teams genuinely believe that chasing payment damages customer relationships. In most cases this is not true - customers respect clear, consistent payment processes from suppliers that also deliver reliably - but the belief is held sincerely and needs to be addressed directly through case-based role-play, not a slide deck. The concept of a customer "driver's licence" - ensuring that only people trained in both relationship management and cash terms can engage commercially with customers - is worth piloting.
On digitalisation: the order-to-cash process links procurement, manufacturing, and sales in a data chain where patterns, gaps, and interdependencies can be identified and acted on. A well-built data lake with clean CRM and ERP integration makes overdue management largely automated. The human element - the call from Accounts Receivable, firm and professional - remains essential at the decision point, but the monitoring and escalation that leads to that call should be systematic rather than manual.
Watch out for
Sales will claim they will lose orders if payment terms are tightened. In practice, the customers most likely to push back hardest on payment terms are also the customers most likely to be a net drag on working capital. That is not a reason to lose them, but it is a reason to price the relationship properly. Accounts Receivable teams, if they have been doing collection in name only, will claim they are too far from customers to drive effective cash collection. The answer is structured alignment with Sales - shared access to CRM records, clear call protocols, and common visibility on overdue status by account.
Closing the series
Across three posts, we covered the three main cash flow levers in any manufacturing or FMCG value chain: inventory and DoH, supplier payments and DPO, and customer payments and DSO. The argument throughout has been the same. Finance reports on cash flow. Operations - Sales, Production, Procurement - must own it. That means measured, incentivised, and consequence-managed.
The "ugly duckling" of cash flow metrics, treated with knowledge and sustained focus, turns into something rather more impressive. A white swan, if you will. The black swans - the supply disruptions and market shocks - are best held at bay by the kind of resilient, redesigned supply chain covered in the 21st-century supply chain posts.
And as always: "No money, no honey."
And now for something completely different in the next post.
Stay safe. Be bold.
Daniel
The views expressed in this post are my personal professional opinions, based on research and publicly available information. They reflect analysis of industry trends and practices, not assertions of fact about specific companies or individuals. Nothing in this post constitutes legal, financial, or investment advice.
