How to Improve Your DSO: Ramp Up Your Collection … Management 5. Communication 6. Collections • 15 Reasons When to Turn an Account Over to a Collections Agency • What is Credit

The Accounts Receivable and Order-to-Cash Expo Conference is produced by:

5/3/2016

How to Improve Your DSO: Ramp

Up Your Collection Cycle

Chris Doxey, CAPP, CCSA, CICA,CPC

President, Doxey, Inc.

The Accounts Receivable and Order-to-Cash Expo Conference is produced by: 2 5/3/2016

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).


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

DSO and Other Metrics in the

Accounts Receivable Cycle


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.


Two DSO Calculations

1. DSO = Accounts Receivable × Number of Days

_________________________

Credit Sales

2. DSO = Number of Days in the Period

_________________________

Accounts Receivable Turnover


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?


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.


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!


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!


What happens if DSO is reduced by 5 days? Excess Receivables Investment

with DSO = 65 days Excess Receivables Investment

with DSO = 60 days Improvement

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


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

Six Strategies to Reduce Your

DSO


Six Strategies to Reduce Your DSO

1. Credit Approval

2. Invoicing



5. Communication

6. Collections


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?


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?



• Have you considered discounts?

• What about dynamic discounting?

• Consider accepting credit cards and ACH payments?

• And consider the size of your invoices.



• 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?


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


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?


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%.


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.



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.



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


5/3/2016

What is Credit and Collections

Management (CCM)?


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.


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


5/3/2016

17 Steps to Reduce Outstanding

Account Receivables


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



Receivables

8. Centralize Data & Communications

9. Manage Your Resources

10. Score Customers Using Cost of Credit

11. Be Proactive

12. Focus on Key Accounts



Receivables

13. Automate Business Processes

14. Secure Financial Information

15. Involve Your Sales Team

16. Escalate Trouble Accounts

17. Work as a Team


5/3/2016

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.



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.



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.



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.


Q&A


Speaker Contact Information:

Chris Doxey, CAPP, CCSA, CICA, CPC

President, Doxey, Inc.

[email protected]

571-267-9107

mailto:[email protected]

Documents

How to Improve Your DSO: Ramp Up Your Collection … Management 5. Communication 6. Collections • 15 Reasons When to Turn an Account Over to a Collections Agency • What is Credit