In one recent consulting assignment, I was asked to help a company whose DSO was skyrocketing. As a result, the company was having trouble paying bills as they came due. I was given an orientation by the CFO and Credit Manager who admitted they were stumped by the problem. I was introduced to the collection team and told them I wanted to watch, listen and learn I said that I was looking for ways to improve DSO, but my assignment did not involve pointing the blame at anyone.
I sat down with a couple of collectors. The first thing I noticed was that they were ignoring accounts with balances 1 to 30 days past due. I asked: Why aren’t you calling customers that are 1 to 30 days past due? I was told at some point one or more customers complained about over-zealous collections on balances less than invoices 1 to 30 days past due. In response, the message the collectors heard was: Always wait until an account is 30 days past due before commencing collection efforts.
In this situation such as this when customers have had things so good for so long, it would be difficult to start demanding payments on this company’s net 30 day terms. I suggested a tiered approach:
- Month 1: Call on invoices more than 20 days past due.
- Month 2: Invoices past due more than 15 days.
- Month 3: Invoices more than ten days past due.
As a result, they experienced a significant reduction in DSO within 3 months. Sure, some customers balked. However, armed with statements such as this: “We are not demanding that all invoices are paid as soon as they come due, but we simply cannot fund an extra 30 days dating” almost every made some effort to significantly improved its payment pattern.
This creditor was and is a profitable, growing and innovative company. The source of their cash flow problem was fairly obvious to me. One might even believe that management could not see the forest for the trees. Sometimes, the true value of a consultant involves examining a problem with no preconceived notions about what solutions are and are not unworkable.
Questions: What is your grace period before calling delinquent customers? How do you respond to complaints that you are being too aggressive in your collection efforts?
Michael Dennis’ Covering Credit Commentary. Michael’s website is www.coveringcredit.com.
The opinions presented are those of the author. The opinions and recommendations do not necessarily reflect the views of CMA, or their Officers and Directors. Readers are encouraged to evaluate any suggestions or recommendations made, and accept and adopt only those concepts that make sense to them.