Attendees of a presentation sponsored by
the Credit Research Foundation (CRF) received a great deal of
information about the value of performance measures including how they
work, which ones work best and what a company stands to gain from
effective measurement. CRF Vice President Lyle Wallis, CCE gave the
Wallis noted that there are some simple preliminary
steps that some companies forget to take when implementing a
performance measure. "You need to know what your company is trying to
do," Wallis said, referring to an example where a company spent 30
man-hours per month measuring items that were of no consequence to the
company’s strategic mission. "Ask yourself ‘what are we doing?’ You
need to know where the organization is going," Wallis said. "If a
measure provides no benefit, why bother using it?"
Measurements should also be compared to a standard,
otherwise the measurement loses its meaning. "Standards may be set
according to past organizational or industry values or trends," Wallis
said. "The best person to benchmark yourself against is yourself."
Wallis outlined a number of popular performance
metrics used in credit and collections including the Collection
Effectiveness Index (CEI), the Days Sales Outstanding (DSO) and the
Average Days Delinquent (ADD). Of the metrics used by credit
professionals, the most widely used is DSO. "Days Sales Outstanding
represents the number of days on average that it takes a firm to
convert its accounts receivables to cash," Wallis said. "It helps
determine if a change in [accounts receivables] is due to a change in
sales, or to another factor such as a change in selling terms."
However, Wallis noted that the DSO "is not an
accurate or appropriate measure of credit and collection performance,"
nor is it the best illustration of the condition of total receivables.
"As a measure for credit and collection performance [the CEI] is
probably your best measure," Wallis said. The CEI expresses the
effectiveness of collection efforts over time and reflects both the
amount collected and the amount available to collect. The formula for
the CEI can be found on CRF’s website at www.crfonline.org.
Wallis also discussed how using metrics could
increase a company’s bottom line. "As credit folks, we can have a major
impact on the organization’s cash flow and overall profitability,"
Wallis said. Even small changes to measurements like DSO can increase
operating profits and cash flow for a company.
"As an effective manager, we need to
recognize all the tools that are out there," Wallis said. There are a
number of different things that can be done in order to make a credit
department more efficient and more profitable. "Focus on what you do
best," Wallis said. "Identify those functions at which you are most
proficient and outsource the rest. Don’t squander resources on fringe
activities that lend minimum value to the firm."
Wallis also suggested that managers evaluate their
billing process for timeliness, accuracy, clarity and standardization.
"Carefully scrutinize each step in the process," Wallis said. "What we
need to do to productively manage the receivables portfolio needs to be
Source: NACM and CRF