Good Treasury Management Can Reduce DSO


Credit professionals can help reduce Day Sales Outstanding (DSO) not only by setting credit terms that are appropriate to the creditworthiness of customers, but also by good treasury management practices. Advice and information about the topic was provided during an NACM audio teleconference, March 28, 2007. Madeline Sprague, CTP, of JPMorgan Chase, presented the teleconference entitled, "Treasury Management for the Credit Professional."

Sprague explained various forms of payment such as checks, drafts, wire transfers, Automated Clearing House (ACH), Electronic Funds Transfers (EFT) and payment to vendor websites. She noted that time is money, and the longer the money takes to actually get into a company’s bank accounts, the more it costs in terms of interest on borrowed funds or lost interest in invested company funds. She pointed out that every day DSO is reduced, it translates directly to the bottom line profitability of a company. Therefore, Sprague said the goal of treasury management is to optimize profitability by improving the payment cycle, increasing efficiency and managing processing costs.

Some of the factors involved in the amount of time it takes a check payment to translate into useable cash is the mail float, the processing float — getting it through company channels — and the check float from the depository bank to its final availability. She said by shaving a day off here and there on these float times, a company can reduce DSO. In order to reduce mail float, lockboxes can be located strategically closer to customers. Sprague explained the various ways to set up a lockbox system to reduce the amount of time it takes to process a check. She advised checking into the various bank fees to determine exactly what level of service would be most cost efficient. A company can also turn a desk into a teller window through the use of a bank-approved scanner that allows the scanning of check information and transmits it directly to a bank, reducing the time it would take for a physical check to be mailed or delivered. "You may want to look at a desktop deposit option," Sprague said.

Sprague explained the differences between ACH and fed wire and the costs of each. She pointed out that ACH takes about two days and has lower fees than fed wire. "You now have another option besides fed wire." Payroll direct deposit is a form of ACH. She noted that more information about a payment is provided with ACH. "When you receive information, you get plenty of information which cuts down on payment posting time."

As with all NACM audio teleconferences, time was reserved at the end to receive and answer questions from the participants. On a question about ACH Debit, Sprague noted that it has been very slow to develop. "Your ability to reach into [a customer’s] account and debit is going to be very limited internationally." On the question of the legality of an emailed copy of a check, Sprague said, "An emailed copy of a check does not have the same legal standing as one scanned into a bank’s proprietary scanning system." On the question of what to do with paper checks that have been converted to legal imaged copies under Check 21 provisions, Sprague said, "Once a check is converted into a substitute, at that point you can do whatever you want with the paper check. We recommend you keep the paper items for at least two weeks. You do have to have a destruction plan." And on the question of whether the United States would be adopting the International Bank Identifying Number IBIN used in Europe Sprague said, "I’m not aware that the U.S. is thinking about changing to that."

Source: Tom Diana, NACM Staff Writer

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