Aged receivables: the report to check every week
Invoicing is not the same as getting paid. How to read the aged receivables report, why it deserves a weekly look and how to turn it into concrete action.
Finance · 4 min read
DSO, DPO and working capital: three numbers to understand your cash
A profitable company can still run out of cash. Three simple indicators show where cash gets stuck and which levers free it up.
When profit does not show up in the bank
It often happens that the income statement tells of a good year while the bank account tells a different story. The reason almost always lies in working capital: the money the company has advanced and not yet recovered, in the form of customer receivables and inventory, net of what it in turn owes its suppliers.
Measuring working capital in euros is useful, but an absolute amount says little when the company is growing. That is why indicators expressed in days are used, relating receivables, payables and inventory to activity volumes. The calculations are simple, within reach of any finance team, and they give management, sales and purchasing a common language.
DSO: how many days to get paid
DSO, days sales outstanding, shows how many days pass on average between invoice and payment. It is calculated by dividing trade receivables at the end of the period by revenue for the period and multiplying by the number of days. A DSO of sixty against agreed payment terms of thirty days says, without further analysis, that customers pay a month late on average.
A few precautions make the number more reliable. Receivables include VAT while revenue usually does not, so use comparable figures. A short period is distorted by a single large invoice issued at month end, so a rolling average is better. And the overall DSO should always come with a breakdown by customer, because it is often a handful of names that move it.
- 01 Trade receivables at period end
- 02 Divided by revenue for the period
- 03 Times the days in the period
- 04 Compared with agreed terms
DPO: how many days to pay
DPO, days payables outstanding, measures the same thing from the supplier side: how many days pass on average between receiving a supplier invoice and paying it. It is calculated the same way, dividing trade payables by purchases for the period and multiplying by the number of days.
The temptation to stretch DPO and finance the business at suppliers’ expense is understandable, but it comes at a price. Suppliers who are paid late tend to protect themselves with higher prices, less flexible terms or lower priority on deliveries. The sensible goal is not to pay as late as possible, but to pay on time on the agreed terms, and to negotiate better terms when there is room to do so.
DPO is also useful as an internal check. A value well below the agreed terms means the company is paying earlier than it needs to, perhaps out of habit or because invoices are settled as soon as they arrive; a value that rises without any explicit decision often points to invoices stuck in approval.
The goal is not to pay as late as possible, but to pay on time on the terms you negotiated.
The cash conversion cycle
Putting the two indicators together, and adding average days of inventory for companies that hold stock, gives the cash conversion cycle: days to collect plus days of inventory minus days to pay. The result shows for how many days the company has to fund its own operations, between the moment it pays and the moment it collects.
It is a number that lends itself to good conversations. Cutting it by a few days frees up cash without asking for new credit, and the levers are clear: collect faster, hold less stock, align payments with actual due dates. For a services company with no inventory, the cycle comes down to the difference between DSO and DPO, and the work focuses almost entirely on collections.
Track them over time
These indicators are most useful when watched over time rather than as a one-off snapshot. A DSO that creeps up a few days every quarter is a signal to take seriously even if the absolute value looks acceptable, and a regular comparison with agreed payment terms shows how much margin is really being lost.
In Finance, DSO, DPO and aged receivables are calculated automatically from sales and purchase invoices and reconciled payments, with a breakdown by customer, supplier and group company. The trend is visible month by month alongside the cash forecast, and AI highlights customers who are stretching their payment times before the effect shows up in the bank account.
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