Your balance sheet holds powerful levers that directly impact your company's cash position and financial health. According to Karen Berman and Joe Knight, most companies unknowingly tie up significant cash in accounts receivable and inventory—cash that could be working harder elsewhere in the business. Understanding how to actively manage these balance sheet components enables you to free up working capital and improve your company's financial flexibility in ways that can transform your operations.

Think of your balance sheet as a control panel with various dials and switches. Each lever you adjust—whether it's accelerating collections, tightening credit policies, or optimizing payment terms—has an immediate impact on cash flow. The key lies in understanding which levers to pull, when to pull them, and how hard to pull without disrupting operations or damaging customer relationships. This delicate balance requires both analytical skills and practical judgment.

Throughout this lesson, you'll discover practical techniques that companies like Enterprise have used to dramatically improve their cash positions. You'll learn how to evaluate credit risks systematically, implement collection strategies that work, and make informed trade-offs between sales growth and working capital requirements. These aren't theoretical concepts—they're proven methods that managers use every day to strengthen their companies' financial positions and create competitive advantages in their markets.

Days Sales Outstanding (DSO) measures the average number of days it takes to collect payment after making a sale. The reality is clear: The longer a company's DSO, the more working capital is required to run the business. Every day of DSO represents cash that's tied up in customer hands rather than available for your operations, and this seemingly simple metric can make the difference between a company that thrives and one that struggles with cash flow.

Enterprise, the car rental company, developed an innovative approach to managing DSO that goes beyond traditional collection tactics. They recognized a fundamental truth: customer satisfaction directly influences payment behavior. Satisfied customers pay faster, while unhappy customers delay payment or dispute charges. This insight led them to create the Enterprise Service Quality Index, which doesn't just measure customer satisfaction—it predicts collection patterns. When customers indicate they'll "definitely use Enterprise again," those accounts typically pay 15-20 days faster than neutral or dissatisfied customers.

The beauty of Enterprise's approach lies in its dual benefit. By tracking customer intentions through regular surveys, they identify service issues before they become collection problems. If a branch's satisfaction scores drop, managers know to expect slower payments and can proactively address both the service issues and potential cash flow impacts. This predictive capability allows them to manage DSO more effectively than companies that only track backward-looking metrics, creating a virtuous cycle where better service leads to faster payment, which improves cash flow and enables further service improvements.

To understand the financial impact of DSO on your own operations, use the following formula for your calculation:

DSO = (Accounts Receivable + Revenue) × # of Days in Period

• for monthly calculations, multiply by 30 days
• for annual calculations, multiply by 365 days

If you have $500,000 in monthly revenue and $750,000 in receivables, your DSO = ($750,000 ÷ $500,000) × 30 days = 45 days. Here's the critical insight—each day of DSO costs you real money. With $500,000 monthly revenue, each DSO day represents approximately $16,667 in tied-up cash. Reducing DSO by just five days would free up over $83,000 in working capital that could be invested in growth, used to pay down debt, or held as a cash cushion.

However, DSO management extends far beyond aggressive collection tactics. Operations and R&D managers must ask whether product problems might make customers reluctant to pay. Sales teams need to consider whether they're extending credit to financially healthy customers who have both the ability and willingness to pay on time. Customer service must monitor satisfaction levels that predict payment patterns, understanding that every interaction shapes the customer's payment priorities. This interconnection means everyone in your organization influences DSO, whether they realize it or not, making DSO management a truly cross-functional responsibility.

Not all customers are created equal when it comes to credit risk, yet many companies apply the same credit terms to everyone or make decisions based on sales pressure rather than financial prudence. One small manufacturer developed a surprisingly effective framework for credit decisions—they created an ideal customer profile and named him Bob. This "Bob criteria" framework has helped the company maintain one of the lowest DSO rates in their industry while still growing revenue, proving that disciplined credit management doesn't have to mean turning away business.

Bob's characteristics are refreshingly straightforward and practical. He works for a large, established company known for paying bills on time—the kind of company that has been around for years and has systems in place for managing payables. He values ongoing relationships over one-time transactions, indicating a partnership mindset rather than a purely transactional approach. Bob understands and can maintain the products he purchases, reducing the likelihood of disputes or dissatisfaction that might delay payment. Perhaps most importantly, Bob's company has the financial stability to honor payment terms consistently, regardless of economic cycles or temporary cash crunches.

This systematic approach removes emotion and guesswork from credit decisions, creating a common language that sales, finance, and management can all understand. Instead of sales pressure driving credit extensions or finance being overly restrictive based on rigid rules, the Bob criteria provide an objective framework everyone can understand and apply consistently.

Let's observe how this framework plays out in a real credit decision:

• Jake: I've got TechStart requesting 60-day payment terms for their $75,000 monthly orders. They're growing fast and could become a major account.
• Natalie: Let's run them through our Bob criteria. Are they a large, established company with a payment track record?
• Jake: Well, they're only three years old and growing rapidly. Their Dun & Bradstreet shows some slow payments to other vendors.
• Natalie: That's concerning. What about the relationship aspect—are they looking for a partnership or just shopping for the best price?
• Jake: Actually, they've already switched suppliers twice in the last year. They mentioned they're comparing us to two other vendors right now.
• Natalie: So they're not meeting our Bob criteria—they're small, have payment issues, and seem transactional. We can still work with them, but not on 60-day terms. How about 30 days with a 25% deposit?

Early payment discounts represent one of the most effective tools for accelerating cash collection, yet many managers misunderstand their true cost and benefit, either dismissing them as too expensive or applying them indiscriminately. The notation "2/10 net 30" means customers receive a 2% discount if they pay within 10 days, otherwise the full amount is due in 30 days. While this might seem expensive—giving up 2% of revenue—the cash flow benefits often outweigh the costs when applied strategically.

Understanding the mathematics is crucial for making informed decisions. A 2% discount for paying 20 days early (from day 30 to day 10) equates to an annual interest rate of about 36%, which sounds astronomical at first glance. However, this comparison misses the broader picture. You're not simply comparing interest rates; you're evaluating the total cost of working capital. If your company borrows at 8% annually to fund operations, and offering discounts reduces your borrowing needs, the trade-off becomes clearer. Furthermore, faster collection reduces bad debt risk and collection costs, benefits that don't appear in the simple interest calculation but significantly impact your bottom line.

Enterprise's experience provides a compelling real-world case study of strategic discount implementation. By implementing a selective early payment discount program, they reduced DSO by 8 days and improved their cash position by $150,000 within six months. The key word here is selective—they didn't offer discounts to everyone, recognizing that blanket policies waste money. Large, reliable customers who always paid on time didn't need incentives; they were already optimal payers. Instead, Enterprise targeted mid-tier accounts that had the ability to pay quickly but lacked motivation to prioritize their payments over other vendors. This targeted approach maximized the impact while minimizing the cost.

The psychological aspect of early payment discounts proves equally important to their financial mechanics. Customers view the discount as found money—a reward for good behavior rather than a penalty for late payment. This positive framing makes customers more receptive than late payment penalties would, creating goodwill rather than resentment. Sometimes a 1% or 2% discount can help a struggling company collect its receivables and thereby lower its DSO—but of course it does so by eating into profitability. The question isn't whether to offer discounts, but rather when and to whom, making this a strategic decision rather than a tactical one.

Implementing an effective discount strategy requires careful monitoring and continuous refinement. Track which customers take discounts, which pay at net terms, and which pay late despite the incentive. This data reveals valuable insights about customer cash flow patterns and payment priorities. If a previously prompt-paying customer stops taking discounts, it might signal financial distress, alerting you to potential collection problems before they materialize. Conversely, customers who always take the discount demonstrate strong cash management and financial health—potentially warranting increased credit limits or other favorable terms that can deepen the business relationship.