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How to Effectively Reduce DSO

In 2012, Lhoist North America hired Chris Soignier to head up its Credit department and asked him to get control of credit risk and decrease DSO. DSO had just been incorporated into the sales department’s bonus calculation, but it was clear that this was only one small step towards the company’s bigger corporate goals.

Chris came into his new job with guns blazing and quickly identified the following: the company’s DSO calculation and reporting required revisions, the credit department needed to improve its relationships with the sales department and customers, credit limits needed to monitored and enforced, and hiring practices within the department needed to be adjusted. He realized he had a lot to do!

DSO Calculation

The original DSO calculation used annual sales:

Accounts Receivable Balance/(Sales for last 12 months)/356)

The problem with this calculation is that DSO was a substandard measure for monitoring seasonal collection performance. Chris noted that “even if all receivables were within terms, DSO would rise during seasons with higher revenue and would decline during periods of lower revenue when comparing the accounts receivable balance to annual average sales.” The sales department needed a DSO measure that showed if customers were current on recent invoices so collection problems could be quickly identified and acted upon.

The revised DSO calculation used quarterly average sales:

Accounts Receivable Balance/(Sales for last 3 months/91)

Chris convinced the company that this calculation was best for measuring immediate performance and trends, as well as how well the credit department was managing receivables and collections.

DSO Reporting

The sales department became very interested in the key DSO calculations that were tied to their future bonuses, resulting in a newly designed online dashboard. Management and individual sales professionals had instant access to current DSO calculations, historical graphics of monthly DSO trends and targets. Chris said, “The best measure of performance was not DSO, but DSO compared to target DSO.”

Since salespeople tend to be competitive, the report was designed to show all individuals’ performances at once on the same chart, giving them even more incentive to manage their DSO and not show up at the bottom of the performance comparison.

Improved Relationships

Chris’ major goal was to build “relationships with sales and show I was there to support them while adhering to company policy.” He implemented frequent meetings with sales executives and local sales people to show his commitment and build understanding. He also visited customers which helped him secure his external and internal relationships. These relationships ultimately helped when other issues occasionally arose.

Credit Limit Monitoring and Enforcement

Chris saw quickly that credit limits were not being enforced and “began daily review of a report that highlighted customers that had exceeded their credit limit or had orders in the system that would put them above the limit if outstanding invoices were not paid. The appropriate credit analyst and sales person was immediately informed of each material situation to rectify.”

Chris dealt with resistance from sales by explaining the issues and being willing to explore workable solutions. His emphasis on building relationships helped him get their cooperation while minimizing risk for the company.

Hiring Practices

The company’s longstanding practice of new hires coming on as contractors before being hired as full time employees negatively impacted Chris’ ability to hire high quality people. The most qualified candidates appeared to be adverse to contract positions and looked for employment elsewhere. Chris convinced management that the “try before you buy” approach of hiring was not working and gained approval to hire high quality people as full time employees from the start. Department performance improved and turnover decreased.

Results

Chris’ first year showed improvements that got him noticed by higher ups. His department was functioning better. Credit risks decreased and collection results improved. Relations with the sales department improved dramatically, DSO incentives created teamwork and immediate report availability gave the sales department the information needed for success. DSO improved 7 days year over year in the first 6 months of 2013 which represented a 14% improvement as it went down from 50 to 43 days. Of equal importance, few if any sales were lost due to stricter enforcement of credit limits, and write offs decreased. Chris’ hard work helped the company achieve the goals established by senior management.

Dean Kaplan is Principal at The Kaplan Group. Dean’s expertise is widely rec­og­nized in the debt col­lec­tion industry. His advice has been published in a number of industry newsletters such as Credit Today and InsideARM and he is a frequent speaker at industry events.

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