How to Improve Your DSO: Ramp

Up Your Collection Cycle

Chris Doxey, CAPP, CCSA, CICA,CPC
President, Doxey, Inc.

5/3/2016
The Accounts Receivable and Order-to-Cash Expo Conference is produced by:
Chris Doxey, CAPP, CCSA, CICA, CPC spent most of her career implementing “top gun” leadership teams
and processes in her quest to fight fraud and implement internal controls at Digital Equipment
Corporation, Compaq Computer Corporation, and Hewlett Packard. She held senior finance and
accounting positions which allowed her to develop and implement standards of internal control for all
aspects of financial operations – focusing on the procure to pay (P2P) process.

She was recruited to assist WorldCom (MCI) with the implementation of internal controls, policies, and
corporate governance in 2003. She had an opportunity to work directly with the new CEO, CFO and Vice
President of Business Ethics. She developed a program for entity level internal controls, developed ethics
training plans and programs, implemented delegation of authority and segregation of duties policies, and
systems access controls.

Chris holds a BA in English, a BS in Accounting, a Master’s in Business Administration, and a Graduate

Certificate in Project Management. She is a Certified Accounts Payable Professional (CAPP), holds a
Certification in Controls Self-Assessment (CSA), is a Certified Internal Controls Auditor (CICA), and is a
Certified Professional Controller (CPC).
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 Agenda
• DSO and Other Metrics in the Accounts Receivable Cycle
• Six Strategies to Reduce Your DSO
1. Credit Approval
2. Invoicing
3. Fast Payment Incentives
4. Receivables Management
5. Communication
6. Collections
• 15 Reasons When to Turn an Account Over to a Collections Agency
• What is Credit and Collections Management (CCM)?
• 17 Steps to Reduce Outstanding Account Receivables
• Lack of Capabilities Impacts

5/3/2016
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 DSO and Other Metrics in the
Accounts Receivable Cycle

5/3/2016
The Accounts Receivable and Order-to-Cash Expo Conference is produced by:
 What is DSO?

• 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.

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 Two DSO Calculations
1. DSO = Accounts Receivable × Number of Days
_________________________
Credit Sales

2. DSO = Number of Days in the Period

_________________________
Accounts Receivable Turnover

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 About Cash Flow and Cash Flow
Management
• Cash flow is the movement of money in and out of a business.
• The goal of cash flow management is to decrease the amount of time it
takes to collect cash, while increasing the time interval for disbursing it.
• The first step in improving cash flow is to determine why there's a cash
flow problem.
• Where is cash tied up?

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 Carrying Costs of Accounts Receivables
Calculating just how much it costs to carry your receivables is relatively simple. Determine
how much interest you would pay per day on your total annual receivables and multiply this
by the average number of days it takes you to collect on credit sales (DSO).
Example: XYZ Company has $20,000,000 in annual credit sales and a DSO of 65 days. We’ll use the
current U.S. prime interest rate (federal funds rate) of 3.25% and round the results to the nearest dollar.

((Total Receivables x Interest Rate) / 365 (days)) x DSO

(($20,000,000 x 3.25% or 0.0325) / 365) x 65 = $115,753

Thus, it costs XYZ Company $115,753 in interest every 65 days (or $649,998 annually) to provide its
customers $20,000,000 in annual credit facilities.
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 Cash Traps
• Cash sitting in non-interest bearing accounts
• Unnecessary or underused inventory
• Fixed assets: building, equipment, cars, etc.
• Loans to officers, employees, affiliated companies
• Uncollected sales (accounts receivable)

One of the most common cash traps is uncollected credit sales or

accounts receivable!
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 Excess Accounts Receivables Investment
We’re assuming the average DSO in XYZ Company’s industry is 50 days.
 XYZ's DSO 65 days
 Industry DSO - 50 days
 Excess Investment in Receivables 15 days
 1 Day's Sales (Annual Sales/365) x $54,795
 Cash Invested in Excess Receivables $ 821,925
 Cost of Borrowing x 3.25%
 Annual Interest $ 26,713

In this example, XYZ Company has $821,925 cash invested in excess receivables, plus $26,713
in interest charges, for a total $848,638 cash flow trapped in receivables!
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 What happens if DSO is reduced by 5 days?
Excess Receivables Investment Excess Receivables Investment Improvement
with DSO = 65 days with DSO = 60 days
XYZ DSO 65 Days XYZ DSO 60 Days 5 Days
Industry DSO - 50 Days Industry DSO - 50 Days
Excess DSO 15 Days Excess DSO 10 Days
One Day Sales X $54,795 One Day Sales X $54,795
Cash Invested $821,925 Cash Invested $547,950 $273,975
Cost of Borrowing X 3.25 Cost of Borrowing X 3.25

Annual Interest $26,713 Annual Interest $17,808 $8,905

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 What happens if DSO is reduced by 5 days?
• If you add the $547,950 improvement in Cash Invested in Accounts Receivables with the
$17,808 reduced interest costs, you get $565,758 cash flow trapped in receivables .

• Now, compare this to the XYZ Company's original cash flow trapped in receivables, which
was $848,638.

• $848,638 - $565,759 = $282,879

XYZ Company was able to reduce their cash flow trapped in receivables by $282,879.

5/3/2016
The Accounts Receivable and Order-to-Cash Expo Conference is produced by:
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 Six Strategies to Reduce Your
DSO

5/3/2016
The Accounts Receivable and Order-to-Cash Expo Conference is produced by:
 Six Strategies to Reduce Your DSO
1. Credit Approval
2. Invoicing
3. Fast Payment Incentives
4. Receivables Management
5. Communication
6. Collections

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 1. Credit Approval
• Are you performing credit evaluations on all new customers?
• Are your credit terms appropriate and adhered to by your sales
department?
• Do you have a procedure in place for updating credit information on a
regular basis?
• Do you belong to an industry credit group?
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 2. Invoicing
• Are your invoices accurate and prompt?
• Are payment terms clearly stated?
• Do you provide incentives for early pays?
• Have you considered EIPP (electronic invoice presentment and
payment)?
• Are your customers paying you via ACH?
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 3. Fast Payment Incentives
• Have you considered discounts?
• What about dynamic discounting?
• Consider accepting credit cards and ACH payments?
• And consider the size of your invoices.

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 4. Receivables Management
• Do you have a collection process in place?
• Do you adequately follow-up on customer disputes and late pays?
• Are you measuring performance against goals? Do you regularly review aging
reports?
• Do you have an understanding as to why customers are paying late (i.e. invoice
discrepancies, quality issues, etc.)?
• Have you trained your customers to pay within terms?
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 4. Communication
Communication your customer’s accounts payable department can
have positive results and should include the following items.
• Monthly Review of Outstanding Invoices
• Discussion of Disputed Invoices
• Developing an Action Plan to Resolve Disputed Issues

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 6. Collections
• Do you have employees focused on collections and are they well trained?
• Do they have enough time to follow up on all past due accounts?
• Have you considered outsourcing part of your receivables portfolio (small
balances, specific divisions, etc.) for first party collections follow-up?
• Should you consider using a professional third party collection firm?

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 About Delinquent Accounts
• A survey by the Commercial Collection Agency Association (CCAA) revealed that,
after three months, the probability of fully collecting on a delinquent commercial
(B2B) account dropped dramatically with the length of delinquency.

• At just 90 days past due, the likelihood of a full collection drops to 73%.

• After 6 months, it drops to 50%.

• After 1 year, 25%. And after 2 years, it's a meager 10.5%.

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 15 Reasons When to Place the Account with a
Collection Agency
1. Credit agency ratings indicate the customer is showing signs of distress.

2. There have been layoffs or significant turnover of senior employees.

3. The payment check bounces twice.

4. You receive a check that is less than the amount owed, states something like “payment in full”
and the amount was not part of an agreement with you.

5. Your telephone calls are not being accepted and messages are not returned.

6. The customer relocates without notifying you.

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 15 Reasons When to Place the Account with a
Collection Agency
7. A promise of at least partial payment is made, and then broken.

8. A payment plan is agreed upon and the customer begins payment, but then starts missing
payments.

9. The customer has bounced checks to you or another vendor.

10. Payment checks received were drawn on a closed account, or an account which has been frozen
by the bank.

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 15 Reasons When to Place the Account with a
Collection Agency
11. You are told that the business is for sale, or you find out there has been a change in ownership.

12. The new owners claim they are not responsible for the debts of the previous owners.

13. You learn that other creditors are now selling on COD terms.

14. The customer raises a dispute that wasn’t raised initially, or you feel that any dispute that has been
raised is groundless.

15. The customer states they are considering filing for bankruptcy

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 What is Credit and Collections
Management (CCM)?

5/3/2016
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 What is Credit and Collections
Management (CCM)?
Credit & Collections Management (CCM) is a suite of integrated business applications that extend a
company’s accounts receivable and accounting system to facilitate credit management, billing and
invoicing, remittance processing, dispute management, and collections processes. CCM includes the
following six functional areas:
1. Credit Facilitation,
2. Billing and Invoicing,
3. Remittance Processing,
4. Collections Management,
5. Dispute Resolution, and
6. Reporting and Analysis.
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 The Benefits of CCM
• There are many benefits to implementing a CCM application to extend existing
accounts receivable functionality and processes.
• Some of these are reduced transaction costs, improved cash flow and cash forecasting,
optimized staff productivity, and reductions in bad debt and write-offs.
• Companies who automate collections and nothing more are realizing:
– 10 to 20 percent reductions in daily sales outstanding (DSO)
– 25 percent reductions in past due receivables
– 15 to 25 percent reductions in bad debt reserves
– Return On Investment (ROI) in as little as 2 months and usually in no more than 6-9 months

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 17 Steps to Reduce Outstanding
Account Receivables

5/3/2016
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 17 Steps to Reduce Outstanding Account
Receivables
1. Create a Plan
2. Provide Accurate & Timely Information
3. Develop Key Performance Indicators (KPIs)
4. Define Roles and Responsibilities
5. Standardize Communication Processes and Messaging
6. Document Credit and Collection Activities
7. Define Dispute Resolution Procedures

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 17 Steps to Reduce Outstanding Account
Receivables
8. Centralize Data & Communications
9. Manage Your Resources
10. Score Customers Using Cost of Credit
11. Be Proactive
12. Focus on Key Accounts

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 17 Steps to Reduce Outstanding Account
Receivables
13. Automate Business Processes
14. Secure Financial Information
15. Involve Your Sales Team
16. Escalate Trouble Accounts
17. Work as a Team

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 Lack of Capabilities Impacts

5/3/2016
The Accounts Receivable and Order-to-Cash Expo Conference is produced by:
 Lack of Capabilities Impacts

Among the most significant obstacles faced by credit departments is the lack of
important AR capabilities. Many organizations are handicapped by:

1. Inadequate Software Systems. Antiquated legacy systems, as well as many

Enterprise Resource Planning (ERP) software do not provide the A/R
functionality required to deliver needed performance. Many credit departments
must also deal with multiple, disparate systems across divisions.

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 Lack of Capabilities Impacts
2. Ineffective Processes. Lack of standard, consistent, well-documented processes
hamper productivity resulting in: increased DSO; drop in dollar value of cash
collections; rising customer service complaints; higher write-offs and interest
expense; added staffing costs; and, more spending on third-party collections. In
many companies, A/R management remains decentralized, creating the problem of
attempting to obtain uniform results by integrating multiple methods. Even where
control of credit and collection functions is centralized, poorly documented
procedures and/or uneven application are ongoing problems.

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 Lack of Capabilities Impacts

3. Insufficient Reporting Capabilities. Inability to generate accurate, meaningful

reporting makes it all but impossible to deliver a true valuation of the company’s
receivable portfolio. Resultant inaccuracies reduce the organization’s ability to meet
legislative and public demands for accountability and transparency. Insufficient
reporting also hinders the manager’s ability to identify and correct underlying
process inefficiencies.

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 Lack of Capabilities Impacts
4. Inflexible Staffing Models. Staffing levels out of sync with demand are a drain on
profitability and resources. Because wages and benefits are fixed costs, significant
dollars are wasted when permanent staff exceeds immediate need. On the other
hand, productivity takes a hit when tasks exceed headcount. Companies in high
growth mode are particularly vulnerable. Mergers, acquisitions, or accelerated sales
can cause AR to get out of hand, overwhelming understaffed credit departments.
Utilizing temporary staffing in these situations actually increases the burden on
managers who must train and supervise temporary help.

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 Q&A

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 Speaker Contact Information:
Chris Doxey, CAPP, CCSA, CICA, CPC
President, Doxey, Inc.
chris@chrisdoxey.com
571-267-9107

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