How credit standards affect DSO and accounts receivable risk
Credit standards directly impact your DSO. Learn how to evaluate risk, set the right terms, and use automation to control accounts receivable effectively.
Your credit policy determines your day’s sales outstanding (DSO). One of the most impactful elements of that policy is the credit standards you set. These standards influence the level of financial risk your business takes on and how much working capital you need to finance accounts receivable.
In this article, we’ll break down what credit standards are, what to consider when setting them, and how they impact your DSO.
What are credit standards?
Credit standards are your business’s financial guidelines to evaluate a customer’s ability to pay. They help control risk by identifying which customers are likely to meet their payment obligations—and which might not.
By applying consistent credit standards, you can better manage who receives credit, how much is extended, and under what terms.
Key factors to consider when setting credit standards
To manage risk and control DSO, consider the following financial indicators:
Credit history
A customer’s track record is a strong indicator of future behavior. Look at:
- Longevity: How long have they been offered credit?
- Credit limits: What’s the highest credit extended to them?
- Terms of sale: What terms were offered in the past?
- Payment history: Do they consistently pay on time?
Reviewing credit history helps determine both the amount of credit and the appropriate payment terms to offer.
Financial resources
Customers with solid financials are typically more reliable. Look for:
- Strong financial statements
- Positive bank references
- Adequate working capital
- Balanced debt levels
Financial stability means they’re more likely to pay on time—even during economic shifts.
Borrowing capacity
Can the customer borrow when needed? Those with available credit and a history of repaying loans are less likely to delay supplier payments.
Borrowing capacity offers a buffer against unexpected expenses or slow periods, reducing the chance they’ll rely on you to manage their cash flow.
Credit terms
Only offer as much credit as necessary. Avoid overly generous terms that could stretch your customer’s cash flow or encourage late payments. Structure terms that reflect the customer’s capacity and your business’s risk tolerance.
Collateral
In higher-risk situations or industries where it’s common, consider securing credit with a deposit or letter of credit. While collateral can reduce your risk, be cautious: extending excessive credit just because it’s backed by collateral can still lead to high DSO and cash flow issues.
Balance risk and sales growth
Stricter credit standards can lower DSO and reduce the chance of bad debt. However, they may also limit potential sales or strain customer relationships. Finding the right balance between risk control and sales enablement is key.
Automate to stay ahead of DSO
Technology plays a critical role in keeping DSO under control. An automated accounts receivable platform like Sage AR Automation empowers your team to:
- Track credit terms and customer performance
- Send automated reminders
- Prioritize follow-ups based on risk
- Maintain consistent credit and collection policies
With the right tools, you can enforce your credit standards and reduce manual workload—helping your team stay proactive instead of reactive.
