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This article is aimed at the Finance/Credit Professional responsible for the Credit and Collection Performance of its customer base. Your performance will be based on Daily Sales Outstanding (“DSO”) which is defined as:  the average number of days that a company takes to collect revenue after a sale has been made. A low DSO number means that it takes a company fewer days to collect its accounts receivable. A high DSO number shows that a company is selling its product to customers on credit and taking longer to collect money.

The DSO is calculated as: (Accounts Receivable/Total Credit Sales)/360 days. A company that properly manages DSO can utilize cash to drive further growth, pay dividends and or implement variety of other strategies.

The following is a sample checklist for the finance/credit professional to follow:

  • Provide due diligence on all new customers and establish specific credit limits (adhere to and periodically review credit limits) for all customers.
  • Review Supply contracts
    • Are there special terms of sale?
    • Are the products being supplied custom? Requiring above average lead times?
      • If there is an issue Purchasing and Operations should be made aware.
    • Is your company supplying rebates?
      • Who is calculating the rebates?
      • Are rebates issues via credit memo or check?
      • Can rebates be applied to open/past due balances?
      • Provide rebate documentation to the customer.
    • Review all open balances with the customer.
      • Is the customer past due? Do credit limits need to be adjusted?
        • Review all future orders for customers at or above its credit limit.
        • Communicate with your sales force---don’t operate in a vacuum. The sales team may have important information or a customer contact that can resolve open issues.
      • Communicate with your customer and provide information (Lost Purchase Order’s, Proof of Delivery, etc.) when applicable. A positive working relationship with your customer’s Accounts Payable Department is invaluable.
    • Communicate externally with credit bureaus and trade associations. How well is the customer handling its other obligations?

When the Finance/Credit Professional implements a system to quickly collect sales she/he provides an invaluable resource to her/his employer: Cash Flow. Secure and reliable cash flow makes everyone happy and the Credit Manager popular.

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