No FREE Lunch – Michael Dennis, CBF

No FREE Lunch

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:

  1. Rejecting new credit applicants I considered to be high risk
  2. Lowering or withdrawing open account terms on all accounts that could be classified as marginal risks
  3. Holding orders as soon as a customer became more than 15 days past due (without justification)
  4. 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)
  5. Placing customers on hold immediately if they took deductions without providing supporting documentation
  6. Requiring the CFO to give me the authority to veto any request for extended terms proposed by sales
  7. Requiring updated quarterly financial statements from all active customers as a condition for continuing to extend credit
  8. 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.

Michael Dennis, MBA, CBF, LCM

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.

5 Replies to “No FREE Lunch – Michael Dennis, CBF”

  1. We do offer the use of a credit card at time of ship on credit worthy accounts, we also offer payment in advance for those who do not qualify for terms this definately reduces your DSO. We periodically offer early pay discount as an incentive to pay down account balances to open credit lines and ship more product again dropping the DSO but at a cost to the bottom line.

    The reality is in my industry the majority pay 10 to 30 slow on average and it’s acceptable.

  2. I suspect you already knew at the time of the request that lowering the DSO by 15% would result in a great deal of “collateral damage” but taking the time to carefully detail to your CFO as to how it could be achieved was an eye awakening credit risk management experience for her.

  3. What what was your CFO trying to measure with DSO? Did you benchmark your Company’s performance against Peers? Many Industries
    a sizeable portion of the Sales is in the last month or even the last week of a Quarter, it’s possible to collect all open AR prior to last month and still have a sizeable DSO.
    Dennis, DSO as you have editorialized many times in the past, is not a measurement of collections, but Operational efficiency.In many instances DSO may have little to do with Credit & Collections. The Collections Effectiveness Index may have been a better metric to explain your plight. Along with a portfolio risk analysis.
    I can’t speak to experience of the CFO, but to make such a bold request she should have had a plan or she had no idea what was going on? The CFO’s ultimate goal should have been a sound cash Conversion Cycle that included DSO, DPO, and ITO to better manage the company’s working capital. not just one element. I’m interested to hear about your less radical approach- sometimes it takes an enitire buisness cultural change including education.
    (Not sure why some of your Financials requirements were not already in place, that doesn’t sound like a Michael Dennis Credit Dept.)

  4. We have several ways of reducing DSO from the Credit side.

    1) Offer expedited payment by Check by Fax, credit cards, or even paying for my customer to FedEx their payment to me in time for the last day of the month.

    2) Visit customers to work problems out or just “show the flag”. Getting in front of your customers’ finance and payables people gives them a name to go with the face, and makes it harder for them to say “no”. This is especially true if you visit their CFO or Controller.

    3) Aggressively pursuing past due balances, including a warning that their account is going to be placed on COD in five to seven business days if they don’t have the past due paid. (This is done in as friendly a fashion as possible, and expressed as helping them avoid digging themselves even deeper.)

    4) Ensure that any special terms are correctly reflected on invoices. Any issue that creates a problem creates slowness.

    5) In the same vein, Billing needs to make sure all invoices are correct, and that any corrections or revisions are done promptly.

    These helped us reach an 11.4% reduction in our A/R over the past fifteen months.

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