The Problem with DSO

When it comes to metrics, there is no gold standard for all credit professionals or companies. Metrics help tell a clear story about different parts of the order-to-cash process, and tracking meaningful metrics can unlock success by helping the credit team reach goals, gain recognition and run at the highest level of efficiency. But measuring the wrong results can have a negative impact on accounts receivable (AR) performance.

Days sales outstanding (DSO), for example, is a metric commonly requested by senior management. However, credit professionals should know that better metrics exist to accurately measure the health of accounts receivable. DSO is widely recognized and used in the trade finance industry despite its flaws. This metric is heavily influenced by actions outside of the AR department, such as sales, and can be misleading.

“DSO is arguably the most commonly used metric to measure working capital performance across the order-to-cash cycle, as well as to assess the effectiveness of managing customers and collecting accounts receivable,” reads an article from The Wall Street Journal. “Yet, using DSO alone can be misleading, especially when comparing performance to peers, because organizations tend to calculate it using different approaches.”

When DSO is supplemented with other metrics—like average days delinquent, true DSO or weighted-average days to collect—it can paint a more complete picture of AR performance. “I personally find average days delinquent to be the most valuable AR metric as it relates to managing an AR department,” said Ray Yarborough, CCE, CICP, CCRA , senior accounts receivable manager at Connexity, Inc. (Santa Monica, CA). “Being able to quickly identify payment trends by a customer and changes to these payment trends helps me determine where my collectors should focus their efforts.”

If you must track DSO, find ways to use it to cast a positive light on the credit department. For example, DSO can provide the value in dollars that you are adding to the organization. Calculate the number of days in DSO your department has improved over a period and convert each days’ worth of DSO to a days’ worth of revenue for the company. “One of the core levers that affect cash is how quickly companies are collecting from customers, and DSO is one of the most commonly used indicators of that,” Wanya du Preez, a senior manager with Deloitte Cash and Working Capital, Deloitte Transactions and Business Analytics LLP, told The Wall Street Journal.

When it comes to choosing the best metrics to track, sharing data with your team can ensure a higher level of accuracy. Some credit professionals typically share metrics and data with only upper management or the C-suite, but others share data with their entire organization. Every department works toward the same goal of maximizing profit. This is key because the perspective of the credit department is critical for all business decisions.

It is important to share credit metrics with many different departments within your company. “At my company, we have created a dashboard where several people have access to look at those metrics,” said JoAnn Malz, CCE, ICCE , CCE , ICCE , NACM chair elect and director of credit and collections at The Imagine Group, LLC (Shakopee, MN). “Our CFO and financial planning and analysis team have access because they use a lot of our information to be able to work on forecasts. Any sales leaders who request access are also granted the access to our reports and dashboards as well.”

Sharing the right data and metrics is essential, but being able to effectively package and present the data to upper management or other departments who need the information matters just as much. If communication is unclear, the message can get lost. Get to know how everyone likes to receive information.

For example, do they like graphics or black and white number-based presentations? Those who need the information will be much more receptive to what they can understand. A picture can say a thousand words, said Steven Winn , corporate credit manager at Marek Brothers Systems LLC (Houston, TX). “I want my pictures to say the right thousand words, so any graphs in a report should be captioned in one brief sentence,” he added. “If the graph is the report itself, a full summary of the point being made should accompany the graph.”

As Yarborough currently works on enhancing AR dashboards to add charts and graphs showing current and historical metrics, he said the visuals are made for the viewer to be able to obtain quarter-over-quarter and year-over-year comparisons. “I feel that this is the best way for upper management to quickly consume the data, and if desired, they can easily drill into the details that support these charts and graphs” he said. “This is being done in Power BI, and the data feeds directly from our ERP system, so this is all automated, and the data is provided in real time.”

The best metrics to track are the ones that help your department work efficiently. Every metric should drive an action in the credit department, otherwise, it is meaningless, said Winn. “The metrics that help you measure progress towards your specific goals matter,” he added. “What is meaningful to me may not mean much to your work at your company in your specific industry. It is not one size fits all.”

Are you a metrics junky? Be sure to join NACM’s virtual Performance Metrics Thought Leadership Discussion Group . You also may be interested in our latest white paper, Beyond the Numbers: The Art of Measuring Modern Credit Department Performance . Check out another NACM white paper on Keep DSO in its Place .