Establishing Credit Department Authority Over Terms

http://www.credittoday.net

During a recent three-month period, our company's Days Sales Outstanding increased by eleven days. The controller called me for an explanation for the almost 20% increase. I spent about one hour gathering information and found that most of it was directly attributable to our sales department.

Specifically, our sales manager is allowed to approve extended dating to customers "to meet competition", which is exactly what he had done.

I met with the controller and explained what I had found. She commented that I could have refused to release the orders, and I pointed out that the risk associated with the customers who were offered extended dating was negligible based on their size and creditworthiness. The controller asked rhetorically what she was supposed to tell the bank about the increase in DSO.

I've thought a lot about this situation, and I've come up with the following general observations.

In order for a credit professional to meet his or her manager's expectations, those expectations must be clearly defined and understood.
If credit professionals want to avoid problems like this involving their subordinates, then they must take the time necessary to communicate their expectations to their subordinates.

If the credit department is going to be held accountable for changes in Days Sales Outstanding, then the department must be given the authority and the autonomy to refuse to release orders to creditworthy accounts requiring extended dating.

Credit Management Portal
Unparalleled resources to help you with all aspects of the credit function: partnering with sales, reducing DSO, efficient ways to manage A/R, credit reporting resources, how today's credit leaders are solving problems, best practices in all phases of the quote to cash process...
Check out Credit Today's Credit Management Portal

Even with this authority, DSO is still going to be influenced by factors beyond the control of the credit manager. Those factors include:
- Increases or decreases in sales volume caused by seasonality or other factors.
- Timing of sales within a specific month.
- Timing of any month-end cash cut off.

Credit managers are often placed squarely between a rock and a hard place.

Clearly, the credit manager always has the ability to hold orders.

Unfortunately, they are often just as likely to be criticized for holding an order as they are for releasing an order.

I've never been a big fan of DSO as a measurement of credit department's performance, but I recognize the controller's and the bank's interest and legitimate concerns about such a steep increase in DSO. Unfortunately, since I was not made aware of the controller's expectations with respect to managing DSO, I was unable to provide her or the company with the level of service they expected.

Editor's Note: The above article originally appeared in the Credit & Collection Manager's Letter, a newsletter purchased by Credit Today in 2006. This article originally appeared prior to 2000.