Magazine article Business Credit

Take It to the Top: Metrics Worth Taking to Upper Management

Magazine article Business Credit

Take It to the Top: Metrics Worth Taking to Upper Management

Article excerpt

Sorry credit managers, but days sales outstanding (DSO) is not going away anytime soon, and probably never. It's so entrenched in the minds and culture of upper management and its finance officers that to ignore it would be silly, if not ill-considered.

That said, there is nothing mandating that only one solemn performance metric has to be used to evaluate the effectiveness or quality of a credit department. In fact, credit managers who take the time and put in the effort to educate upper management and steer them toward other, more accurate, benchmarking tools receive better results than perceptions indicate.

In the September/October issue of Business Credit, NACM Mentor of the Year Larry O'Brien, CCE, ICCE, director of corporate credit at Potash Corporation, discussed the need to get in front of management. Moreover, O'Brien stressed the need to not just get in their airspace, but be completely prepared once you get there.

So, how does a credit manager do that, and do it well? Often, it can be about using the metrics already being measured within the credit department and breaking the information down into easily digestible messages for the upper level positions like chief financial officers--after all, they're extremely busy, and even many who do look at credit as a "value-add" as opposed to a cost engine still view it as just one or even a niche part of the business.

Alternatives/Complements to DSO

Sitting in the metrics-focused Executive Exchange Session at the 2012 Credit Congress, one would be hard pressed to find a "fan" of DSO. The bottom line is that DSO is not going away, so accept that but support it with additional metrics for balance.

"We still use a rolling DSO as part of our calculation because it's something that is just so visible and so easy to understand," said Brian Northrop, CCE, ICCE, General Mills Sales, Inc., who sat on the session's panel of experts. "If we don't have it on the report, they're going to ask, 'where's the DSO?' And, from more of a long-term evaluation, it still does give a rough estimate of what your turnover rate is."

That said, just because the uppers use it and like it doesn't mean it is the only important metric to abide by or push, said George Schnupp, CCE, U.S. director of credit at Anixter, Inc. The key is to not just criticize DSO, because that isn't going to help anything. A better approach is to bring other metrics into the conversation to bump up against DSO and provide a bigger picture. "Some of us smart alecks would do nothing but knock DSO because we often have no control over it;' he told NACM. "But, now, we are beginning to understand how to use it."

So what are some of the big, important and easy-to-understand metrics to present to upper management? The answer really depends on who you're asking. Schnupp, for one, is a big fan of best possible average days to pay (BPADP). The metric helps offset factors that can distort DSO, such as if a big dollar sale comes in very close to the closing of a period. Schnupp says it helps to paint a more accurate picture to non-credit people where DSO is going and why.

Edwin Bell, PhD, CBA, ICCE, senior national credit manager at W.W. Grainger, Inc., said that he prefers aging beyond due date over straight DSO because it stands as a more realistic measure of collection effectiveness. Plus, it's a fairly easy metric to explain to upper management. "Aging in my company is measured from due date, where DSO is measured from date of sale. We have multiple contract agreements in place with some of our larger customers granting extended terms, which increases DSO, but not aging beyond due date. This is the number I would prefer to report to upper management to demonstrate how the credit department is performing."

Some are a little more off the beaten path. Charles Gahala, EdD, CCE, ICCE, a former credit manager-turned-professor of finance at Benedictine University in Illinois, noted that he became a fan of economic value added (EVA). …

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