A company needs more working capital to operate the business the longer its Day Sale Outstanding is.

Most businesses fund client purchases of goods and services using cash on hand. The amount of money customers owe at a specific period, based on the value of what they have purchased prior to that date, is represented by the "accounts receivable" line on the balance sheet. Days Sales Outstanding, or DSO, which represents the typical time it takes to collect on these receivables, is the fundamental statistic that gauges accounts receivable. A company needs more working capital to operate the business the longer its DSO is.

The DSO is the typical time it takes to collect receivables.

How to control DSO?

Managers in charge of operations and research and development, for instance, should consider whether there are any issues with the products that can discourage customers from making payments. Does the business offer what clients want and anticipate? Is the delivery problematic? Because clients are dissatisfied with the products they are receiving and opt to take their time with payment, quality issues and delayed deliveries frequently result in late payment.

Managers who interact with customers, such as those in sales and customer service, must pose a comparable set of inquiries. Are our customers in good financial standing? What is the norm for paying invoices in their sector? Are they located in a country or region that pays promptly or slowly? It is up to salespeople to raise any concerns about a customer's financial situation since they sometimes have the first interaction with a consumer.

Credit managers must determine whether the terms being offered are advantageous to the business and appropriate given the consumers' credit histories. They must assess if the business extends credit too readily or is overly stringent in its credit standards. Increasing sales and giving credit to people who pose a higher risk of default are always trade-offs. Credit managers must specify the exact conditions they are willing to accept. Is net 30 days acceptable, or must we to allow net 60?

Credit managers need to come up with measures to stop late payments, such providing discounts for early payment.

What inventory management is?

These days, inventory is a key concern for many managers (and consultants!). Anywhere they can, they try to lower it. They employ trendy terms like "just-in-time inventory management," "lean manufacturing," and "economic order quantity" (EOQ).

The trick is to keep as little inventory as possible while still making sure that every component, including raw materials, will be available when needed and that every product will be offered for sale when a consumer requests it. A manufacturer must constantly place orders for raw materials, produce goods, and store them for customer delivery.

In order to avoid the dreaded stockout, which is when a product is unavailable just as a client needs it, wholesalers and retailers must continually replace their stock. But, every item in inventory can be thought of as frozen currency, or money that the business is unable to use for other purposes. How much inventory is actually needed to keep up with demand while reducing that frozen cash? That is, after all, the million-dollar query (and the reason why companies engage consultants).

Did you realize?

The less inventory a corporation needs to carry, the more salespeople may offer standard products with few variants. When a product line is kept simple with only a few easily replaceable options, inventory goes down and keeping track of it is easier.