How to Improve Working Capital Efficiency and Reduce DSO in 2025

Working capital efficiency is a non-negotiable priority for CFOs and finance teams in the current economic environment, marked by inflation, volatile FX market conditions, and supply chain disruptions. It’s not only about securing access to funds but also ensuring medium- and long-term financial health, as well as maintaining a good reputation with suppliers and stakeholders.

The biggest bottleneck in achieving optimum working capital efficiency is high days sales outstanding, which leads to low liquidity.

This guide outlines the steps to improving working capital efficiency by eliminating challenges and issues with accounts receivable and providing actionable tips on how automation and technology can unlock financial and operational agility for your organisation.

While ‘working capital’ is a term frequently used among financial teams, it is often misunderstood. Before focusing on optimising and improving efficiency, it is crucial to understand what it is and how it relates to liquidity, accounts receivable, and accounts payable.

At its core, a company's working capital measures the short-term financial health of a business and denotes funds an organisation is using to support its day-to-day operations. It’s the difference between the assets (e.g. cash, inventory, receivables) and the liabilities (payables, loans).

Company's working capital = Current assets - Current liabilities

An efficient company's working capital means that the organisation uses its resources effectively to meet financial obligations and reinvest in ongoing growth. When looking at the efficiency of working capital, the following three financial processes are worth paying attention to:

Accounts receivable. Avoiding late or missed payments from customers improves cash flow. Ensuring timely payments from customers enhances cash inflows.

Accounts payable. Payment schedules need to be organised and optimised in a way that retains liquidity while maintaining good supplier relationships.

Inventory management. Ensuring stock levels are appropriate to avoid shortages or waste.

For financial teams, the goal is to strike a balance between these elements – this will allow the business to stay resilient, avoid liquidity issues, and fund growth endeavours.

While internal bottlenecks are usually the most common blockers to achieving greater working capital efficiency – and the ones businesses have the most control over – finance teams should not ignore the wider macro-environment. Unfortunately, this is not very favourable and may present additional challenges that complicate working capital management.

High inflation causes increased prices of goods and services, which strains cash flow for nearly every business, regardless of the vertical. On top of this, rising interest rates mean the cost of borrowing money renders loans risky and expensive. With that, more businesses are turning to internal cash optimisation rather than relying on external financing.

Supply chain disruptions and delays force companies to order in advance and often hold excess stock, which ties up cash and reduces liquidity. Additional workforce shortages and increased costs of living hike operational expenses, putting further financial strain on businesses. Companies need to plan for future working capital needs to navigate these challenges effectively.

All these macroeconomic factors combined push finance leaders and CFOs to really hone in on how they can optimise working capital efficiency internally using improved processes and technology.

Accounts Receivable (AR) management is a cornerstone of managing working capital efficiently, yet over a third of businesses in the UK and Europe still use fully manual processes to manage their receivables, while less than half have automated only part of the process.

Manual AR processes can significantly harm working capital efficiency due to delays and errors:

Delayed invoicing. Paper-based or manual invoicing slows down the payment cycle. It can take days to issue the invoice, and for customers, it’s important to pay on a schedule convenient for their own liquidity. The later they receive the invoice, the later they pay.

Errors in cash application. Mismatched payments create reconciliation bottlenecks, increase administrative workloads, and lead to incorrect revenue reporting or issues during audits.

Limited visibility. Since payments are matched to invoices manually after they have been received, there is no real-time visibility into AR ageing data, making it impossible to prioritise collections and disputes.

Prolonged disputes. Similarly to the above, when a dispute arises – whether due to a wrong, missing, or late payment – resolving it manually can take months, straining relationships and cash flows.

All these issues contribute to further escalating DSO in the short and medium term. In the long term, liquidity and profitability may be affected.

Working capital efficiency can be optimised by embracing digitisation and automation of the accounts receivable process or parts of it. AR automation can help businesses boost cash flow by speeding up collections and reducing DSO. Companies that have already implemented AR automation report improved liquidity and a competitive advantage in unfavourable market conditions.

Here’s how AR automation tools can help optimise your working capital cycle:

Automated Invoice Issuance, Delivery, and Reminders
With automation, invoices can be issued and instantly sent to clients. As the payment due date approaches, the tool triggers automatic reminders. Digital delivery of invoices – especially when combined with an online portal that allows clients to pay using multiple methods – facilitates faster collections. The entire process eliminates delays caused by traditional manual handling, while tracking ensures greater accountability and visibility.

Result: Faster invoice delivery leads to quicker payments, directly reducing DSO and improving cash flow.

Intelligent Cash Application
Modern AR automation solutions use AI and machine learning algorithms to match incoming payments with open invoices, automatically posting them to the accounting tool. This reduces errors and speeds up the reconciliation process.

Result: Businesses leveraging automatic matching and posting for receivables report productivity gains of up to 70%, enabling finance teams to focus on strategic tasks rather than manual data entry. This also reduces operational costs and financial pressures.

Real-Time Insights into AR Ageing
Automated AR tools provide access to real-time AR ageing views and reports, empowering finance teams to make better-informed decisions based on available cash flow, prioritise collections on overdue accounts, and resolve client disputes.

Result: Increased visibility into incoming cash and open invoices, coupled with real-time tracking, reduces the number of overdue invoices and missed payments, thus contributing to better cash flow and improved working capital efficiency.

Streamlined Dispute Resolution
Some automation tools, in addition to automatic reminders, also open disputes for overdue payments and facilitate communication between finance teams and clients. Faster resolution of payment disputes accelerates cash flow and improves client relationships.

Optimising working capital efficiency means auditing and improving payment, inventory, and receivable processes. For receivables, finance professionals can use the following steps to integrate AR automation and unlock measurable improvements:

Step 1: Establish a Strategic Framework

The first step towards optimising working capital is establishing a strategic framework. Finance leaders must define specific, measurable objectives that align with the wider financial goals of the business.

An absolute must for improving the efficiency of working capital is reducing DSO. However, enhancing cash flow and improving overall operational efficiency should not be overlooked in working capital metrics. Well-defined KPIs in these areas can help track progress and ensure accountability:

DSO Ratio. Reflects the average time required to collect payments. A decreasing DSO ratio indicates improved working capital efficiency.

Cash Conversion Cycle (CCC). Tracks the time between cash outflows and inflows - the shorter the cycle, the more optimised it is.

Collection Effectiveness Index (CEI). Evaluates the efficiency of the AR collection process.

Tracking net working capital is crucial as it serves as a key financial metric for assessing a business's short-term financial health and efficiency.

Negotiating payment and credit terms with new and existing customers is crucial for improving working capital efficiency. Sales teams play a significant role in these commercial negotiations, impacting the overall management of working capital.

Step 2: Identify and Implement the Right AR Automation Solution for Working Capital Management

The next step is selecting the AR automation platform. Finance leaders should prioritise solutions that are scalable, user-friendly, and, above all, compatible with the existing workflows and systems used by the business, such as the ERP.

Some necessary features of an AR tool that will help optimise working capital include:

Automated invoicing and payment tracking.

Machine learning (ML) or AI-driven payment matching and reconciliation.

Reminders for overdue or missed payments.

Real-time insights into cash inflows.

Additionally, working capital financing options like invoice factoring can complement AR automation to improve liquidity by converting unpaid invoices into immediate cash advances.

Step 3: Ensure Data Quality and Integration

Automation relies heavily on the quality of data; therefore, ensuring high-quality and accurate AR data is paramount for the successful implementation of an AR automation tool. Inaccurate or incomplete data can lead to invoice errors, delayed payments, and incorrect financial reporting.

CFOs should prioritise:

Ensuring AR systems integrate seamlessly with ERP platforms.

Conducting regular data audits to maintain accuracy.

Establishing centralised data governance to minimise inconsistencies.

These efforts help enhance transparency and build trust among stakeholders.

Step 4: Foster Organisational Buy-In and Training

The adoption of AR automation requires buy-in from all levels of the organisation. CFOs must:

Secure executive and departmental support.

Provide comprehensive training programmes to empower teams.

Develop feedback mechanisms to refine processes over time.

A well-executed change management plan ensures smooth transitions and maximises ROI from AR automation investments.

As technology evolves, CFOs can expect even greater advancements in AR automation to help optimise working capital efficiency, especially given the current economic environment and greater focus on improving internal processes.

Some of the technology that may further help businesses optimise their working capital is already in place. Once receivables automation is fully embraced and integrated within the organisation, these may be the next steps to improve liquidity and long-term financial health:

AI-Driven predictive analytics. Financial analytics tools use historical data on customer payment behaviour to forecast cash flow and optimise collection strategies.

Blockchain payments. In addition to offering card payments or transfers, businesses may want to start offering and accepting blockchain payments. The benefits of these payments include security, transparency, and traceability, thanks to smart contracts.

ERP integration. Connecting your accounts receivable tool and ERP through a native integration will not only save hours of manual work on postings and reconciliations in the General Ledger but also provide complete end-to-end financial visibility for better decision-making. Some cash management and financial operations platforms, like Fyorin, offer both receivables and ERP integration from a single interface.

Optimising working capital efficiency is no longer optional, given the macroeconomic conditions. High inflation, rising interest rates, supply chain disruptions, and labour shortages push businesses to focus on minimising DSO and leveraging AR automation. By doing so, finance professionals can unlock liquidity, strengthen cash flow, and improve the financial position of their organisations, setting them up for continued growth.