Combat Skyrocketing DSO, Collect Early – Michael Dennis, CBF

Combat Skyrocketing DSO

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.

Michael Dennis, CBF

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.

7 Replies to “Combat Skyrocketing DSO, Collect Early – Michael Dennis, CBF”

  1. Dennis,

    I can understand the concept of calling earlier. However, do you also couple the calling with any trigger on holding orders? Do you hold orders at 50 days, then 45 days…? If the customer is not negatively impacted by earlier calls, what incentive does he have to pay sooner? Conversely, if you begin to hold orders sooner, can that be perceived as being too harsh? Thanks.

  2. I did not recommend this approach initially. What I wanted was to break the bad habit of giving customers a 30 day grace period which meant effectively that every customer paid around 60 days on Net 30 day terms.

    I did suggest that if customers failed to change their payment habits, it might be necessary to hold orders to convince customers that the creditor was serious about getting paid more promptly.

    What I did not want to create was a scenario in which the credit department would or could be blamed for alienating or losing customers simply for managing delinquent accounts. For this reason, I recommended a slow but steady approach to DSO reduction.

    Michael Dennis
    http://www.coveringcredit.com

  3. Here are some tips on using credit holds more effectively:

    1.The person placing an account on hold must have a clear understanding of their employer’s tolerance for uncertainty and credit risk. They should also know the history of the account being considered for credit hold including how long the debtor company has been a customer, and how much they purchase on average per year.

    2.Credit holds should be used only as a last resort. When used improperly, the credit department can win the battle but lose the war meaning the credit department can “win” by collecting the past due balance and lose by losing the customer permanently in the process.

    3.Credit holds should not be used when the customer claims that an unresolved dispute prevents them from issuing payment.

    4.Try to limit the number of people in the credit department with the authority to place an active account on credit hold. Anyone should be allowed to recommend a credit hold, but only individuals properly trained and with an understanding of the goals and risk tolerance of the credit department and the creditor company should have the authority and the ability to place accounts on credit hold.

    5.Limit authority to remove credit holds,,, even for rush or emergency orders.
    .
    6.Whenever possible, the customer and the salesperson should be warned ahead of time that a credit hold is under consideration, and how the credit hold can be avoided.

    7.Decide whether an account going on credit hold should also have purchase orders already submitted placed on production hold.

    8.If you are willing to ship customers COD, you lose leverage to force the debtor to clear the past due invoices.

    9.Make sure that you have closed every loophole that could result in an order for a customer on hold being released without your approval.

    10.If and when a customer finally pays they past due balance, the credit limit should not automatically be re-established. If an account was far enough past due to warrant a credit hold, the credit file should be updated and the customer evaluated to determine (a) if open account terms are still warranted and if so (b) what credit limit and payment terms are now appropriate.

    By Michael C. Dennis

  4. Michael,

    I would describe your advice to this client as a recommendation to pick the low hanging fruit first. In my opinion, many customers would react favorably to the tiered approach of gradually eliminating the grace period before beginning collection efforts in earnest.

    I also think Guy’s comment is correct. Certain customers are going to ignore these requests for more prompt payment for as long as possible. For these reluctant debtors, a credit hold may ultimately be the best and perhaps the only leverage your consulting client has to extract payment from these customers in a more reasonable timeframe.

    What are your thoughts?

    Regards

    Michael Zininberg

  5. It occurs to me that if I expect you to answer my question, I should probably answer yours. You asked: What is your grace period before calling customers? I have never worked anywhere with a grace period in which no calls were permitted. I call accounts based on descending dollar amount past due irrespective of whether the account is 1 day past due or 101 days past due.

    In response to your second question, I would imagine that one or two customers may have complained to my manager at some point that I was overzealous in my collection efforts. However, my managers have never asked me to dial back my collection efforts, so I know if no specific complaints from customers that would require different collection tactics.

    MZ

  6. Michael,

    Thank you for your comments. I agree that if your manager has not asked you to change your present approach to debt collection that any complaint that a customer might have made was not a valid to modify the collection processes and procedures you use.

    I also agree with you and with Guy that my recommendation to gradually shorten the grace period would not and could not be completely effective. Customers were very happy with an extra 30 to 45 days to pay invoices. This client did have to use credit holds to ‘encourage’ reluctant customers to pay more quickly.

    With that said, the client is happy with the outcome. DSO has dropped significantly. I made certain my client had a robust procedure to ensure that credit holds were used only when properly approved and only as a last resort.

    Thanks for your comments.

    Michael Dennis

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