Dear Crabby,
Hope you had a nice New Year holiday. I wish mine had been better — I was in a bad mood. Let me explain.
I am the new credit and collection manager at my company and started one year ago. In just one short year, I reduced our DSO from 75 days to 40 days, which I think was a very dramatic decrease. However, when it came to our bonuses, which were directly tied to our annual achievement, I felt mine was way undercompensated.
I am feeling very deflated and not motivated to do much anything to improve this year. What are your thoughts on my DSO results?
Signed: Feeling Down
Dear Feeling Down,
Let me also wish you a happy New Year and hope this year brings you better job satisfaction. Now, let’s look at what’s behind this significant reduction in DSO.
While a reduction in DSO from 75 days to 45 days may appear to be a significant improvement, it is essential to evaluate this change in a broader context before concluding that it is entirely beneficial.
First, it’s important to analyze how this reduction was achieved. If the decrease in DSO is a result of genuine operational improvements, such as more efficient invoicing processes, enhanced collections practices, or better communication with customers, it is likely a positive development. However, if the improvement came from stricter credit terms or aggressive collection tactics, the company might be alienating customers or losing potential sales opportunities. This could negatively impact customer relationships and long-term revenue, even though the immediate cash flow appears stronger.
Another consideration is the sustainability of the change. A drop in DSO could be driven by temporary factors, such as a one-time push to collect overdue accounts or changes in customer payment behavior influenced by economic conditions. If the improvement is not rooted in long-term process enhancements or strategies, it may not persist, and the company could see their DSO increase again in subsequent periods. Evaluating other metrics, such as accounts receivable aging schedules or bad debt write-offs, can help identify whether the improvements are genuinely a reflection of better performance or simply a short-term exception.
Finally, it is crucial to benchmark the new DSO against industry norms. While a drop from 75 to 45 days is notable, what constitutes a “good” DSO also depends on the company’s industry and customer base. For instance, industries with longer payment cycles may find a 75-day DSO still competitive, whereas other industries may consider it suboptimal. The company’s DSO should be assessed within the framework of its strategic objectives, market environment, and competitive landscape to determine whether this improvement is truly meaningful.
So, my good friend, I know my answer is a little long winded but while a reduced DSO is often a positive sign, it is only one piece of the puzzle. To evaluate whether this change is beneficial, you probably should consider its sustainability, implications on customer relationships, cash flow and how it fits into the competition. A comprehensive approach to analyzing DSO will not only ensure that the metric aligns with the company’s long-term goals, but that you are also accurately compensated for bringing about true change and improvements at your company.
Hope this helps.
Crabby
Dear Crabby is a credit collection and human resources advice column by Nancy Seiverd President CMI Credit Mediators Inc. Your thoughts and comments (nseiverd@cmiweb.com) are most welcome!
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