Apples to Apples

By Barron, Jacob | Business Credit, September-October 2014 | Go to article overview

Apples to Apples


Barron, Jacob, Business Credit


Metrics don't differ from country to country or from domestic to international credit. They do differ from organization to organization though.

There isn't a lot of risk in acknowledging that managing receivables domestically and managing receivables internationally are two different animals. There are similarities, sure, and a great deal of overlap when it comes to some of the broader concepts, but each has its own unique set of circumstances and challenges, and a similarly unique box of tools that can be used to manage them.

When it comes to how a company or a credit department measures itself, however, many have bristled at the suggestion that this process of calculating and reporting certain metrics could conceivably be the same regardless of the type of business activity taking place: domestic sales or international sales. It seems that it's often the assumption of a great deal of both the exclusively domestic and exclusively cross-border crowds that the other side measures, or should measure, itself differently than its counterpart.

In the US, the subject of how a credit department measures and reports its performance to its upper management begins and ends with days sales outstanding (DSO). Internationally, it often seems a greater mystery how, with the added variable of an occasionally less stable or culturally alien business environment, credit departments collect their data and monitor their performance. But when it comes to finding out how international credit departments measure and report their performance, the best people to ask are international credit professionals.

Survey Says

FCIB, NACM's international division, conducted a survey among the registered attendees of its International Credit and Risk Management (ICRM) Summit, held in May in Munich. The survey asked the credit and risk professionals about their most-used, most-trusted, most-important and most-asked-about key performance indicators (KPIs). The sample size was small but diverse, comprised of a majority of fairly large companies with broad industry representation and regional basis almost evenly split, with 50% of respondents' companies headquartered in Western Europe and 41% located in North America, with the remaining from the Nordic countries, the Middle East and North Africa (MENA), and Southeast Asia.

It might disappoint some to learn that the discussion of how international credit departments measure their performance also frequently begins and ends with DSO. When asked "From the following KPIs, rank those which your company currently uses in order of importance, where 1 is most important," 37% of respondents chose DSO as the top, most important KPI, and nearly three quarters of participants chose it as one of their top three most important KPIs.

Complaints about DSO being used as the gold standard for credit department performance assessment were also common, as respondents acknowledged the price and sales biases of the world's most relied-upon credit metric. More than just the often flimsy nature of the pure calculation of DSO, comments from the survey criticized the message that aspiring for lower DSO sends to upper management and to the business world at large. "[I] see too many spending time chasing DSO as an absolute rather than profit," said one participant. "Credit is a profit centre and needs to promote itself as such. DSO is an accounting term, which pushes credit into a back office function. Once the profit achieved is shared as the key metric, it changes the company perception of the business."

This question was phrased to make it more about what the respondents' companies considered important. But later in the survey, when asked to use their own knowledge and expertise to rank their KPIs in order of importance, the results were only a point or two off. Thirty-five percent of participants chose DSO as their first choice based on their own opinions and experiences. …

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