My company experienced a significant increase in days sales outstanding (DSO) during the first six months of last year. In addition, some of our more marginal credit risk customers were requesting larger credit limits, and it was becoming progressively more difficult to approve these larger credit limits.

Borrowing the idea from one of our suppliers, the president of the company decided to offer a 1% cash discount in an effort to reduce DSO and as an incentive to our marginal customers to get them to pay more quickly. If this worked, we figured we could reduce our credit risk and ship more promptly. Unfortunately, things did not go exactly as planned.

The good news is that DSO did drop by a few days as certain customers began to take advantage of the cash discount for paying invoices within 15 days of the invoice date. Of course, we allowed a grace period, so it ended up that discounts were taken and allowed even if payments were received within 20 days of the invoice date.

• Our more creditworthy customers took advantage of the cash discount far more frequently than the high-risk accounts we wanted to start discounting.

• When I asked, some of my customers told me that they were indifferent about a 1% discount for payment in 15 days compared to holding onto their cash for 30 or even 45 days.

• Some customers indicated they would be willing to discount if we increased the discount to 2% or more. Some customers indicated they were offered 3% or more by other companies and allocated cash based on the size of the discount.

1. Unable able to take advantage of the cash discount we offered due to their internal cash-flow problems, or

2. By and large not interested in our 1% discount because other suppliers (who may also have identified these customers as representing an unacceptable credit risk) had already offered the customer cash discounts ranging from 2% to 4% as an incentive for early payment.