Magazine article Business Credit

Building Bridges: Weaving the Story Behind DSO Changes as Critical as Ever

Magazine article Business Credit

Building Bridges: Weaving the Story Behind DSO Changes as Critical as Ever

Article excerpt

Day Sales Outstanding (DSO) remains the most requested and most reviewed metric by upper management, whether flawed from a credit function perspective or not. The mere mention of DSO, however, seems to draw significantly less criticism from credit professionals than was the case five years ago. Fortunately, fewer CFOs, treasurers and other upper management officers view DSO as a sort of infallible and complete measurement of what's happening, notably in the credit departments collections prowess. That is significant progress, even though the desire from upper management to receive DSO figures on a regular basis as a sort of go-to-first metric will not be going away anytime soon.

"There are so many variables to DSO, but basically over time, you have to measure something," said Kathryn Marsh, CCE, CICP, director of credit Mitsui & Co. [USA] Inc. "Of course it has its downsides, but we have to measure it to a certain extent because we need to know when we are getting paid." DSO (receivables balances/sales x number of days in a period) is the most widely known metric throughout various departments and functions of a company. It's taught at the academic accounting class level and discussed at length when new credit professionals enter the business. It simply gets the most looks in part because of its popularity with CFOs as well as the notable ease with which it is calculated unlike the credit-popular collections efficiency index or even best possible DSO.

Although credit people may have become slightly less averse to DSO and upper management may be slightly less dependent on it, it remains a measure that does not paint a complete picture of the efficiency of a credit department. As the trend of pushing for more of a seat for credit--or maintaining one gained over time--at the proverbial big table of a business' brain trust continues, it becomes all the more important for credit managers to provide more context on DSO than allowing a flat, cold number to speak for itself.

"If you have peaks and valleys in sales and collections, it makes things challenging," said Dennis Walsh, CCE, CEW, director of credit and collections at BE Aerospace, while serving as a panelist during the Executive Exchange: Performance Metrics session at NACM's 120th Credit Congress & Expo. "We have to keep educating the boss. 'You're right, DSO is going up ... but let's look at this other stuff [other metrics] or the reasons why.'"

Perhaps the key reasons credit professionals cannot allow DSO to singularly speak for itself without explanation is that the number represents a snapshot in time. The potential for unfair distortions is high, especially in certain industries. Industries like agricultural products, seasonally fashionable clothing or recreational sporting vehicles are among the many examples where a certain quarter will have a decidedly larger amount of activity.

"If you take your average over a year on one particular day, it can look really high," Larry Lipschutz, CCE, CICP, director of credit and collections at French Gerleman Electric Co., told NACM. "It could have nothing to do with how your credit department is collecting. You can increase DSO simply by extending the terms with an existing customer. Payments can be 100% on time, and the DSO could still increase.

"It is important that senior management understand the distinction that just because DSO is going up doesn't mean the credit department isn't doing a good job. At the same time, if more capital is caught up in receivables for 48 days one month, 50 days in another and 52 the next; it could be an issue. You need to drill into it."

If You Build It ...

One of the more poignant exchanges during the Credit Congress session came when audience member Jamie O'Sullivan, director of global billing, A/R, credit and collections at LinkedIn, brought up the concept of "Building a DSO Bridge."

"It's quite a useful tool, DSO bridging," O'Sullivan suggested. …

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