Years ago, I worked for a division of a Fortune 500 company with sales in excess of $1 billion a year. One day, the CFO told me that she wanted DSO reduced by 15% within three months. I responded that I would begin work immediately and report back within 24 hours. I returned to my office and outlined the plan for achieving the 15% reduction in DSO. It involved, among other things:
- Rejecting new credit applicants I considered to be high risk
- Lowering or withdrawing open account terms on all accounts that could be classified as marginal risks
- Holding orders as soon as a customer became more than 15 days past due (without justification)
- Withdrawing open account terms to customers that became more than 30 days past due (without a valid reason for doing so such as we acknowledged that we owed them more than they owed us)
- Placing customers on hold immediately if they took deductions without providing supporting documentation
- Requiring the CFO to give me the authority to veto any request for extended terms proposed by sales
- Requiring updated quarterly financial statements from all active customers as a condition for continuing to extend credit
- Requiring all active customers to provide audited financial statements at least annually
The CFO review the email containing this list and scheduled a meeting. In that meeting, I said that reducing DSO was easy but when the ‘costs’ associated with reducing DSO were examined, many companies were unwilling to accept the trade offs. If my goal remained a 15% DSO reduction, “all” the CFO needed to do was to support these 7 proposals and deal with the inevitable collateral damage. She declined to accept this list and I suggested a less rapid and less radical approach to DSO reduction.
The lesson here is that there is no Free Lunch. A company can have whatever DSO it wants as long as it is willing to accept the trade offs.
What strategies do you use to reduce DSO?
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.