Debtor Sales Outstanding Calculator (DSO) to combat Commercial Late Payments and Bad Debt

I wanted to discuss the DSO Calculator, known as the Debtor or Days Sales Outstanding. Before you go running to the Bank for help, that’s if they give you the support you require, you must look internally at the infrastructure of the Credit Management process.

Whoa there, slow dow
Graham you have started to lose me already!! OK, OK let’s start at the beginning and work up to what I mean.

Every company that gives Credit needs to chase for payment, but it’s how you do it that’s important. Any business in any environment can suffer a cash flow issue, and in business what we are all trying to do is market our Services or Products to sell. We tend to forget that we also need to collect the invoice payments or as a small business we don’t have time to chase the debts and it’s put on the back burner until we have time or check our bank balance and realise, oops ‘I better get chasing’. If this is you, I guarantee that you will get caught out at some stage.

You can only run out of cash ONCE!

When we do business for the first time with a new customer, sometimes the process we have goes out the window just to get a sale. The problem is this could have a devastating impact on your cash flow.

It is vitally important that the process for vetting new clients, checking for fraudulent details, checking the credit history and evaluating the potential customer for a credit line is strictly kept in place and followed.

As a business owner you have invested time and money in to this venture, by not getting a company to agree your terms and conditions, opens you up to a possible loss.

Also remember, if a potential new client sees that your business follows a process, they are more likely to see you as a more professional company. If they realise that their is a process they will clear the invoices on time. I have been in the credit industry for a long time and this does follow true.

So,

Do you credit check a potential customer?

Do you check the legal status of the potential customer?

Do you request they fill in a Credit Application?

Do you request references?

Do you evaluate the amount of credit you wish to grant the
potential customer?

If possible, do you visit the potential customer’s premises?
Do you have a procedure for collections?

Do you get the customer to sign your Terms and Conditions? and not just put it on the back of an invoice and hope for the best.

These and more need to be answered, let’s face it we went into business because we wanted to live life on our terms and if you don’t do this, your life style will go down the pan and you will loose money, not make money.

The DSO Calculator measures the efficiency of your collection process and is vital in understanding the averages that your customers pay you on the terms that you express.

Understanding your DSO is the first step in rectifying any issues, and I assure you, you can make substantial savings if you do this correctly.

So for instance you give credit out at 30 days date of your invoice, but your customer’s average payment performance is at 65, Wow, over double the terms that you agreed too. If you reduce your DSO and streamline a disciplined process, you might find you do not need that loan or overdraft facility.

Credit Management is a fantastic tool if understood properly . Remember your credit team speak to everyone up and down the supply chain.

Good luck