Credit Today is the fastest growing publication in the credit field, favored by more and more top credit executives. We cover the world of business, or trade credit, with concise, yet in-depth, reporting. We also publish the most in-depth salary survey in the industry, covering all major credit positions.Credit Today is the fastest growing publication in the credit field, favored by more and more top credit executives. We cover the world of business, or trade credit, with concise, yet in-depth, reporting. We also publish the most in-depth salary survey in the industry, covering all major credit positions.   
Home    Credit Jobs!    Your Account    Search    Resource Directory    Contact    Member Area
 Join Us
We invite you to join our private Members-only Online community and senior level credit executive forum. Click here to learn more.
 Top Resources
Benchmark Central
Best Practices
Checklists
Discussion Forum
Downloads
Job Description-o-matic
 Departments
Bankruptcy Issues
Collections Today
Credit Cards
Credit Dept Profiles
Credit Mgmt Today
Credit Scoring
Deductions Today
Financial Analysis
Fraud
Glossary of Terms
HR Issues Today
International
Legal Issues
Resale Certificates
Resource Directory
Technology Today
Tip of the Week
Unclaimed Property
Outside the Box
Press Releases
 Special Reports
Tech Buyer's Guide
Staff Benchmarking
Salary Survey
Book Store
 About Credit Today
Ad Signup
Media Kit
Mission Statement
Most Popular
Your Account
Member Benefits
Sample Articles
Testimonials
About our ListServ
Forum Signup
Submissions
Tell a Friend
Our Staff
Editorial Advisors
Contact
 Sponsors

Our Subscribers Say...

I think Credit Today is fantastic. You cover many practical topics in the credit field that I use regularly. Just one recent example—a conversation on the ListServ about preferential payments—gave me tips that I used in an actual case. The specific information I picked up from this one discussion saved me $10,000, enough to cover my membership for many years!
- Steve Savino
Manager of Credit & Collections, ASSA Abloy Americas Division, New Haven, CT

Credit Today's Resource Directory and their online e-mail forum (ListServ) provide information on almost any credit-related topic you can think of. It is a great way to exchange information with other credit professionals. As the saying goes, "You don't know what you don't know."
- Scott Goen, Credit Manager, Big Lots Stores, Inc., Wholesale Division

"We've recently started using the ListServ tool within Credit Today. This is phenomenal and powerful forum for gaining immediate feedback, ideas, and suggestions, relative to any credit topic under the sun, all in a real-time e-mail format."
-Javier Vela, Senior Credit Manager, Global Credit Services, JDA Software Group Inc.

"Being a part of the Credit Today online community is like having the expertise of hundreds of credit managers at your fingertips. These credit execs are willing to help you solve topical business issues as they arise. In the current environment of ever increasing competing priorities which reduce our opportunities to meet peers out of the office face-to-face, this is the most valuable tool you can have on your desktop! It's important that we have a mechanism to reach out to our counterparts quickly to exchange knowledge as well as to stay on top of industry trends."
- Victoria Artis, Director of Customer Financial Services, Pfizer, Inc.

"Over the last 10 years I've seen Credit Today evolve from a monthly credit publication into a quality source of information and guidance for the B2B credit community. The website, with its user friendly form downloads, will take you from examples of new account credit applications to bankruptcy forms and everything in between.

The Credit Today ListServ has become the pre-eminent online forum, providing an opportunity for discussion and comments (and occasional humor) from an impressive list of credit professionals."
David Dungan, Director of Credit
Justin Brands, Inc. (A Berkshire Hathaway company)
Fort Worth, Texas

"There are numerous credit periodicals available to the credit professional today. How good is Credit Today? Is it relevant? I always have to read it late, or online because my credit analysts want to read it the minute it comes in. When my staff wants to read a publication before I have a chance to read it then something is working in that publication. We have cancelled our other subscriptions. When you have the best you do not need the rest."
Ron Woods
Corporate Credit Manager-World Wide
Thales Navigation, Inc.

"The newsletter, coupled with the website and the ListServ, are to us, more valuable than any other credit publication, bar none. I try to use at least one article out of each newsletter for departmental training/discussion sessions."
D. Mark Constantine
Corporate Credit Mgr
Fulton Paper Company

"I love Credit Today and read every issue cover to cover. For me, the greatest perk of a subscription is ListServ. I believe Credit Today's ListServ members may be the most knowledgeable Credit brain trust in existence today. I have saved and categorized hundreds of contributions on a wide variety of topics which I refer to often. It's an easy and cost effective way to network and learn."
Doug M. Thomas
Kimberly-Clark Customer Financial Services

Home | Outside the Box | Measure and Manage Collection Efficiency Usin . . . Search 
A.G. Adjustments

Measure and Manage Collection Efficiency Using DSO

By Loral Narayanan
Printer-Friendly Format

The following article originally appeared in the March 2011 issue of ABC-Amega's free client newsletter, "Credit-to-Cash Advisor".

Days Sales Outstanding (DSO) expresses the average number of days it takes a company to convert its accounts receivables into cash. It is one of the most widely used measures employed by credit professionals to analyze the success of their efforts.

There are several ways to calculate DSO. And, when used appropriately and consistently, these calculations can help answer a variety of questions about the effectiveness of your credit and collection policies and practices. Questions like, are your credit terms in line with competitors? Are your collection procedures successful in meeting stated goals? Is your customer base risky?

Before discussing the various DSO formulas, a few words about making DSO, or any performance measure meaningful.

There are basically six requirements (outlined in "Performance Measures for Credit, Collections and Accounts Receivable"):
  1. The measure should express a value that complements and supports the objectives of your company and department.
  2. It must be communicated to all individuals responsible for the process being measured.
  3. It must be compared to some standard, for instance, past company performance, or an industry benchmark.
  4. It must be used consistently, from month to month, year to year.
  5. The results should elicit some action - correcting course, managing change for improvement.
  6. It should provide a benefit. This could be as basic as the satisfaction of reaching a goal that contributes to the organization's success.
Formulas for Calculating DSO
DSO is important as a financial indicator to the extent that it shows the average time it takes for a company to turn its receivables into cash.

It can give insight into the changes occurring within an organization's receivable balance. It does so by indicating whether a change occurred because of a positive or negative fluctuation in sales during that period, or if other business factors, such as promotional discounts, seasonality, selling terms, etc., created the effect.

DSO is important as a financial indicator to the extent that it shows the average time it takes for a company to turn its receivables into cash.

It can give insight into the changes occurring within an organization's receivable balance. It does so by indicating whether a change occurred because of a positive or negative fluctuation in sales during that period, or if other business factors, such as promotional discounts, seasonality, selling terms, etc., created the effect.

Each method for calculating DSO (outlined below) is based on what might be called the Standard DSO formula. And each has its own strengths. The key to making effective use of any of these tools is consistency. Select the methods that work best for you and stick with them.

For each of the example DSO calculations that follow, we will use the same receivables data, given below. The date of the calculation is October 1, 2011.

Date of Invoice Age Bucket Dollars in Bucket Credit Sales in Period
9/28/10 Current $3,000 $5,000
8/28/10 1-30 days past due $3,000 $6,000
7/28/10 31-60 days past due $2,000 $5,000
  Total Open Receivables $8,000 $16,000

Sales Periods (for consistency):
  • Annual = 365 days
  • Six Months = 182 days
  • Quarter = 91 days
  • Month = actual # days in the month
Note that since the data utilized is limited and quite simple, the various DSO calculations should be close to equal.

Standard DSO Calculation
The Standard DSO calculation provides an average (aggregate) time in days it takes to convert accounts receivables into cash. It should be tracked over time and compared to previous company results or industry/competitor benchmarks.

Standard DSO Formula and calculation utilizing data above:

(Ending Total Receivables / Total Credit Sales) x Number of Days in Period

For the 3rd Q: ($8,000 / $16,000) x 91 = 45.5 days DSO

Best Possible DSO Calculation
Best Possible DSO utilizes only your current (non delinquent) receivables to calculate the best length of time you can achieve in turning over receivables. It should be compared to the standard calculation above, and be close to your terms of sale.

The closer your standard DSO is to your best possible DSO, the closer your receivables are to your optimal level.

Best DSO Formula and calculation utilizing data above:

(Current Receivables / Total Credit Sales) x Number of Days

($3,000 / $16,000) x 91 = 17 days Best Possible DSO

Delinquent DSO (Average Days Delinquent) Calculation
Delinquent DSO or Average Days Delinquent (ADD) calculates the average days invoices are past due. This provides a snapshot to evaluate individuals, subgroups or overall collection performance.

Delinquent DSO Formula

Standard DSO - Best Possible DSO = Average Days Delinquent

45.5 - 17 = 28.5 average days delinquent

Sales Weighted DSO Calculation
Sales Weighted DSO, as with the regular DSO calculation, measures the average time that receivables are outstanding. However, some consider it an improvement over other methods of calculating DSO because it attempts to smooth out the bias of credit sales and terms of sale.

Sales Weighted DSO Formula

{($ in Current Age Bucket / Credit Sales of Current Period) +

($ in 1-30 Day Age Bucket / Credit Sales one month prior) +

($ in 31-60 Day Age Bucket / Credit Sales two months prior) +

(etc.)} x 30

{($3,000 / $5,000) + ($3000 / $5,000) + ($2,000 / $5,000)} x 30

= (.6 + .6 + .4) x 30

= 48 days Sales Weighted DSO

Countback DSO Calculation
The Countback Method of calculating takes into account sales fluctuations.

According to an article in Credit Today ("Why You Should Switch to the Countback Method to Calculate DSO"), this method provides a more accurate picture of DSO and its month-to-month fluctuations in sales and past due receivables.

Giving more weight to the current month's sales, it reflects the correct assumption that most of the A/R balance will be from current, as opposed to previous sales. It also takes into account the real effect of the actual difference in the number of days per month (i.e. 28 in February vs. 30 in April, June, September, November vs. 31 the rest of the months).

The Countback Method can be used with any time frame. If terms are net 30, then monthly balances are used. If terms are net 10, weekly numbers might be used. This method involves three steps.

Countback DSO Formula

Step 1. Days counted back = # of days in current month. September = 30

Step 2. Calculate DSO for periods prior to step 1

Month end net A/R balance - Current month's sales = Prior Periods Receivables

Ex. $8,000 - $5,000 = $3,000 prior period's receivables

Note, if the prior period's receivables is larger than the prior month's sales, repeat step 1. The DSO will be greater than 2 months.

Prior Period = (Prior Period's Receivables / Credit Sales for Prior Period) x Number Days in Period (August has 31 days)

Ex. ($3,000 / $6,000) x 31 = 15.5

Step 3. Add DSO for previous period to days counted back in Step 1

Ex. 15.5 + 30 = 45.5 Countback DSO

True DSO Calculation
True DSO calculates the actual number of days credit sales are unpaid by tracking individual invoices to the month of sale.

True DSO Formula

(invoice amount / net credit sales for the month in which the sale occurred) x number of days from invoice date to reporting date (9/30/10)

September Invoice = ($3,000 / $5,000) x 2 = 1.2 days

August Invoice = ($3,000 / $6,000) x 33 = 16.5 days

July Invoice = ($2,000 / $5,000) x 64 = 25.6 days

Sum of True DSO for all open invoices = True DSO per total accounts receivable

1.2 + 16.5 + 25.6 = 43.3 True DSO

Benchmarking DSO
In general, if your company's DSO is no more than 10-15 days longer than terms of sale, the receivables are turning into cash without much difficulty.

Benchmarking data for DSO is somewhat hard to come by, and even more difficult to find without paying a fee.

The Credit Research Foundation (CRF) does a quarterly study, the National Summary of Domestic Trade Receivables (a.k.a., the DSO Survey), that is an examination of the condition of A/R for U.S. companies. The CRF has been collecting this data quarterly since 1960.

The results of the complete study are available to CRF members and those participating in the survey.

A view of the Summary data for the CRF trade receivables survey -- from Q1 2008 through Q4 2010 -- is available on the Credit-to-Cash Advisor website.

Another source of benchmarking information is an industry credit group. Some credit groups perform quarterly DSO surveys based on data provided by the group members. If you are not already a member of a credit group, you should seriously consider becoming one. Why? Read this article on the Credit Today web site, Penny Wise and Pound Foolish.

*****

We thank ABC-Amega Inc. for the above information, which was originally published in their client newsletter "Credit-to-Cash Advisor". ABC-Amega Inc. provides 1st and 3rd party commercial collection services since 1929, and collecting in more than 200 countries worldwide. For further information, contact info@abc-amega.com.


Printer-Friendly Format
·  Managing an Outsourcing Initiative-Phase 4


Bectran
 Most Read
Members only, today...
Members-only, this month...
 Credit Jobs Today
 This Month's Survey

2014 Extended Terms Survey

This month's survey takes a look at:
  • The extent to which customers are demanding longer terms ("their" payment terms, rather than your selling terms)
  • Who approves any requests for longer terms
  • Whether companies have formal policies in place to handle such requests
  • How far terms are being extended
  • What strategies are used by companies when these requests are received
  • Whether credit managers' own companies are also seeking longer terms from THEIR suppliers (and what we can learn from that)
If you're as interested in these results as we are, then please click here to participate!

 Credit Calendar
Previous Month September 2014 Next Month
S M T W T F S
  1 2 3 4 5 6
7 8 9 10 11 12 13
14 15 16 17 18 19 20
21 22 23 24 25 26 27
28 29 30