Magazine article Business Credit

Interpreting Your Metrics: When Some Past Dues Aren't an Issue

Magazine article Business Credit

Interpreting Your Metrics: When Some Past Dues Aren't an Issue

Article excerpt

Days Beyond Terms (DBT) has long been considered a more revealing alternative to the often-misunderstood but widely popular metric Days Sales Outstanding (DSO). But, can segmenting measures like DBT be taken a little bit farther--with little additional effort--to help explain what can be critical differences between overdue customers of various time periods within the 1-30 day delinquent bucket? A panel of experts who presented Performance Metrics, an Executive Exchange session at the 118th Credit Congress this spring, believe the answer is a resounding "yes."

"I think you should not be afraid of trying new things, different ideas," said Ed Walsh, CCE, credit manager Samuel, Son & Co., Ltd., one of the panelists during the session.

What's Your "Days Beyond" Magic Number?

Sometimes a good customer can be allowed to slide a bit. While it is irritating if a customer regularly pays late, the response to a customer who regularly pays four days beyond terms and one who averages 29 days beyond terms can vary greatly. "Actionable past dues are very different," said Walsh. "If you have good customers paying three days late, are you really going to shut them off? Are you going to have a big meeting?"

This is where splitting the 1-30 day bucket can be a good strategy. Walsh and John G. Salek, VP of business services at Genpact USA, suggested splitting the 1-30 day bucket into 1-7 days and 8-30 days. Salek said that total past due doesn't really serve credit managers well and that deeper segmenting isn't a process that should take all that much effort as most AR systems are configurable and able to do something like that. "To go to war over something like that is time consuming and generates ill will," said Salek of the 1-7 days bucket. "If your company really wants that money now, so be it, but I don't think it would be well-received." As Salek noted during the

session, it's important to use metrics and benchmarking against competitors to figure out who are the slightly tardy but solid customers and who are the "real dogs."

Benchmarking can be important in this regard as well. No credit manager wants to believe a customer is putting something over on them with late payments while being prompt with other creditors. "If you can find out they're paying your competitors on the due date and you seven days late, then you have a valid point to make," said Salek. "But you have to do some digging though. You want to be sure about that kind of thing."

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Walsh, like Salek, suggests participating in official industry credit groups as a means to accomplish this. "We do measure against industry standards by participating in groups," Walsh noted. "We know where our competitors are and how we rate."

Even if such a customer is consistently placing a lot of orders and is only mildly tardy, it bears checking (or setting up metrics) to see if the juice is worth the squeeze. Another session panelist, Amber Tallmadge, CCE, corporate credit manager at Central States Manufacturing, suggested setting up customer profitability reports that take into account what sales are, if they are paying on terms, what the deductions are and so on. It's essentially finding a customer's true profitability, she argued. "You need to look and see if they are making you money or costing you money."

In a more recent interview with Salek, he gave an example of a pharmaceutical company where 90% of their output is sold to three large wholesalers. …

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