CM September 2020

NEW
FEATURE
PANEL BASHERS
Understanding DSO
In our new series, we ask a panel of credit management
experts to answer some of our readers’ biggest questions.
Is DSO an
appropriate
measure of a
credit team's
performance?
Panellist Nigel Fields
FCICM
ALTHOUGH, DSO is widely used to evaluate the
speed that cash from sales is returned back to
the business, measured in days, unfortunately
it is not often fully understood by even the most
senior business Directors & CFO’s. A good Credit
Professional needs to be able to demonstrate why
the DSO fluctuates, illustrate the causes of the ups and downs and
be able to offer solutions. You can be damn sure that someone
will be blamed for poor performance when a DSO is high and
regrettably, the finger of blame will often be pointed directly at
the Credit Manager. So, get ready to be able to defend yourself and
show your true credit expertise.
The standard DSO formula is calculated by dividing total credit
sales for a given period, such as a month or year, by ending total
receivables and multiplying the resulting number by the number
of days in the period, e.g. 30 days for a month or 365 days for a year.
(Ending Total Receivables / Total Credit Sales) x Number of Days
in Period.
So, herein lies the dilemma; say a salesperson is offering
longer payment terms to customers to secure additional sales.
These longer payment terms will increase the DSO. Maybe,
some promotions are being offered but, unfortunately were not
communicated effectively internally or externally, leading to
disputes or deductions by customers. Again, this will impact the
DSO. There are many scenarios that go beyond the control of the
Credit Teams that will often cause big swings in the DSO. When
credit sales decline and receivables increase or are flat, the DSO
appears to have deteriorated or, if credit sales are growing, but
receivables are stable the DSO appears to have improved. The
DSO still is an effective and solid KPI to measure the business
performance, but it is NOT a measure of the collection team’s
performance alone.
No matter which metric you use for your analysis, make sure
that you understand exactly what influences and affects it. Become
an expert in understanding it and explaining causes (rather than
the ‘scapegoat’). Remember that sales, billing and collection,
all influence the DSO so each should be measured for their
effectiveness. Once you can measure the performance of each
department, then you can then pinpoint areas for improvement
and help influence change to poor business practices or processes.
Also, bear in mind that sometimes, the business will simply
continue to do as it did previously as it means business rather than
no business.
NIGEL FIELDS
A career in credit management spanning more than 30 years, Nigel is now a
senior consultant with a new start-up company TheBossCat.com which provides
knowledge, skills and various services to a wide range of businesses. Nigel spent
20 years working for Twentieth Century Fox International Film Corp. starting out
in its UK business as Credit Manager and rising to Executive Director for Credit,
responsible for Order to Cash (O2C) across Fox’s entire international business
portfolio. Prior to Fox, he worked as the Credit Manager at Hornby Hobbies and
a Credit Controller for GEC. Nigel says: “I attribute much of my career success to
the CICM community where I am always able to draw upon knowledge and skills
from the extensive array of members and partners.”
Advancing the credit profession / www.cicm.com / September 2020 / PAGE 34