For decades, Days Sales Outstanding has been the headline metric in accounts receivable. Boards ask for it. CFOs track it monthly. Lenders review it during facility renewals. In distribution businesses especially, DSO is often treated as the ultimate indicator of receivables health.
Yet DSO rarely tells the full story.
In many mid market distribution companies, DSO looks stable while margin quietly erodes, cash flow feels unpredictable, and large accounts stretch payment terms beyond what anyone originally agreed. The metric can remain steady even when collections discipline weakens. That is because DSO is an average. And averages hide behaviour.
The KPI that often matters more than DSO in distribution is this: percentage of invoices paid within agreed trading terms.
That single measure reveals far more about control, risk, and future cash stability than DSO alone.
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Why DSO Can Be Misleading in Distribution
DSO smooths everything out. It blends early payers, chronic late payers, strategic accounts on extended terms, and customers taking discounts. A company might report a DSO of 52 days and feel reasonably comfortable. But within that number, there could be serious structural issues.
Consider a distributor operating on Net 45 terms. If 50 percent of customers pay on day 30 and 30 percent pay on day 45, DSO looks healthy. But if the remaining 20 percent consistently pay at 75 days and represent the largest accounts, risk is concentrated and cash volatility increases.
DSO does not reveal that imbalance. It hides it.
It also fails to distinguish between customers who pay exactly on agreed terms and those who require multiple reminders before finally paying. Operational effort does not show up in DSO. Stress in the finance team does not show up in DSO. Margin concessions made to protect relationships do not show up in DSO.
That is why relying on DSO alone can create false confidence.
The Power of On Time Payment Rate
The percentage of invoices paid within agreed terms is a behavioural metric. It answers a simple but critical question: are customers respecting your trading agreements?
In distribution, trading terms are often carefully negotiated. They reflect supplier obligations, inventory cycles, and working capital constraints. When customers consistently pay beyond those terms, even by ten or fifteen days, the impact compounds.
An on time payment rate of 85 percent tells a very different story from 60 percent, even if DSO looks similar in both cases.
For example, two distributors each report a DSO of 50 days. The first has 82 percent of invoices paid within agreed terms, with the remaining 18 percent only slightly overdue. The second has only 55 percent paid within terms, with a significant portion extending 20 to 30 days past due. Operationally and financially, these businesses are not equivalent.
The second company faces more volatility, more manual chasing, and greater risk of bad debt escalation. DSO does not surface that difference. On time payment rate does.
How Term Drift Erodes Control
Term drift is common in distribution. It happens gradually. A strategic customer asks for flexibility during a busy season. A sales manager approves extended terms for a new account. Finance decides not to push too hard on a large retailer who is slightly overdue.
Over time, Net 45 becomes Net 55 in practice.
When that behaviour becomes normalised, DSO adjusts slowly. It does not trigger alarm immediately. But the on time payment rate drops quickly. That drop is the early warning signal.
If the percentage of invoices paid within agreed terms falls from 78 percent to 64 percent over two quarters, something is shifting. Either customers feel less pressure to comply, or internal follow up has become inconsistent. Addressing that early prevents structural deterioration.
Distribution businesses that monitor this KPI closely tend to maintain stronger payment discipline and more predictable cash inflows.
The Margin Dimension DSO Ignores
Another reason this KPI matters more than DSO in distribution relates to margin sensitivity.
Many distributors operate on margins between 10 and 20 percent. Offering early payment discounts, absorbing short pays, or accepting late payments without consequence directly impacts profitability.
If customers are paying late yet still taking early payment discounts, margin leakage occurs. If they consistently short pay small amounts assuming no one will chase it, revenue erodes quietly.
Tracking on time payment behaviour alongside discount uptake provides clarity. It reveals whether incentives are working as intended or being exploited.
Some finance teams use dashboards within account receivable automation software to segment this behaviour by customer tier, product category, or region. The insight is not about technology for its own sake. It is about visibility into patterns that averages conceal.
When the majority of invoices are paid within agreed terms, margin protection improves naturally. When that percentage declines, intervention becomes necessary.
Operational Impact on the Finance Team
DSO also fails to reflect workload.
Two businesses with identical DSO figures can have dramatically different operational burdens. In one, invoices are paid cleanly with minimal reminders. In the other, staff send repeated follow ups, make phone calls, and reconcile partial payments daily.
The on time payment rate correlates strongly with team efficiency. A higher percentage typically means fewer escalations, less manual intervention, and more time available for analysis rather than chasing.
In distribution environments with thousands of invoices each month, even a 10 percent improvement in on time payment rate can translate into dozens of hours saved weekly. That efficiency improves morale and reduces turnover risk within finance teams.
Board Level Implications
For boards and owners, the quality of receivables matters as much as the quantity.
A stable DSO may satisfy surface level reporting, but sophisticated investors look deeper. They want to understand how disciplined the customer base is and how tightly management enforces terms.
A high on time payment rate signals operational control. It suggests that trading agreements are respected and that the company has leverage in customer relationships. That leverage becomes particularly important during economic downturns, when cash preservation is critical.
In acquisition scenarios, receivables quality can influence valuation. Buyers assess whether debtor balances represent predictable cash or contested collections. Again, DSO alone is insufficient. Behavioural payment metrics carry more weight.
Shifting the Internal Conversation
Making this KPI central requires reframing how performance is discussed internally.
Instead of asking only, what is our DSO this month, leadership should ask, what percentage of invoices were paid within agreed terms, and how has that changed over time?
Segmenting the answer by top 20 customers often reveals actionable insights. It may show that a small group drives most of the non compliance. Addressing those relationships directly can improve the overall metric quickly.
When teams focus on this measure, follow up discipline improves naturally. Sales and finance conversations become more structured. Exceptions become visible rather than habitual.
Conclusion
Days Sales Outstanding will always have a place in financial reporting. It remains useful for benchmarking and external comparison. But in distribution, it is rarely the most revealing indicator of receivables health.
The percentage of invoices paid within agreed trading terms provides sharper insight into behaviour, risk concentration, margin protection, and operational efficiency. It surfaces problems earlier and reflects real control over the order to cash cycle.
Technology, including account receivable automation software, can support measurement and consistency, but the real shift is strategic. It is about moving beyond averages and examining how customers actually behave.
In distribution, predictability matters. And predictability starts with customers paying when they said they would.
