DSO never did it for me....

DSO?

Although I have been out of front line Credit for some years I remain fascinated by the fixation of DSO as a key performance indicator; worse still, that it’s tagged in with bad debt levels as measure of credit effectiveness.

Let’s look at DSO.

It’s a simple calculation of total receivables divided by sales in the period multiplied by the number of days in the period.

It simply cannot be an accurate measure if any of the following are evident:-

• ·     Variable period or monthly accounting or indeed cut off dates and given not all months have 30 days
• ·         Variable credit terms are applied across the client base
• ·         Credit does not have absolute control of credit terms or credit granted
• ·         Invoice date only style aged debt reports are produced
• ·         Ledger credit balances are included in Receivables
• ·         Sales volumes during period are erratic or heavily loaded at period or month end
• ·         High volume of ‘corrective’ credit notes are issued in following month
• ·         Cash sales in the month are included
• ·         Credit has insufficient influence in dispute resolution
• ·         Customers have set payment run dates

Some will argue they know it’s a dismal KPI but this is what they are told to report and if consistently applied, it must provide some level of collection efficiency. It really doesn’t.

 

Collection effectiveness (CE) is a far more accurate measure and this looks at how well Credit collects debt on the basis of terms applied.

To be able to work this, the following has to apply:-

• ·      Aged debt reporting schedules produced on a due date basis according to credit terms applied on each client account
• ·     Credit balances must be added back so as not to distort true debtor values in total and across aged columns.
• ·     Cash sales must be excluded from revenue value
• ·     Credit must have total control of terms granted and dispute management
• ·     Aged buckets reflect a percentage of total debt and also separately, a percentage against each respective prior month’s sales. One can see in this way how debt moves from one aged period into the next.

 If you still insist on tradition, throw in a standard DSO and Past Due DSO!

 

Over the course of twelve months, using such measures, one will see a recurring trend in aged buckets and will be able to predict with quite a high degree of accuracy how much of each respective aged bucket will be collected in the current period, rendering huge consistency in cash forecasting. It also provides insight into how each aged debt bucket can be improved on. It’s a great way of showing how effective you are in collecting debt.

Indeed, why not interrogate receivables ageing further; segment according to credit term grouping, by sales team designated, by salesperson allocated, designated collector or by industry sector.