A company’s DSO jumped from 45 to 75 days while revenue grew only 5%. What could explain this, and what would you investigate to determine if it is a temporary or structural problem?

Possible explanations include loosening credit terms to stimulate sales, poor collection processes, channel stuffing (shipping goods but not booking true sales), a shift in customer mix toward slower‑paying clients, or the presence of one or two very large, late‑paying invoices. To assess whether it is temporary or structural, I would pull AR aging schedules to see if the increase is due to a few specific accounts that are past due but likely to pay soon, or broad‑based deterioration. I would compare the DSO increase to peers and industry averages; if the whole industry is stretching terms, it may be competitive. I would also talk to management about their credit policy changes and check if revenue guidance increased, if not, the looser terms didn’t stimulate growth, indicating a problem. If write‑offs are rising, the DSO increase is likely structural and will require an increase in bad‑debt expense.

Follow-up pressure:

• How would this alter your UFCF forecast? Would you simply project a higher DSO, or would you also build in higher bad debt?
• What if the company explains that they sold a large multi‑year contract with milestone payments that caused the spike? How would you separate that from the base DSO trend?
• If the DSO increase is due to channel stuffing, what other financial statement anomalies would you look for (e.g., inventory levels, accruals, cash flow vs. net income)?