How well does your company manage accounts receivable?
Do you have a solid process and team in place? Do you know you average days to collect?
What was your bad debt last year as a percentage of sales? How much bad debt is lingering in your accounts receivable right now?
As distributors we work hard to grow sales, but often neglect the work that is needed to collect on the sale.
The biggest key to success in collections is training your staff to be diligent in monitoring accounts receivable and following up consistently and frequently with your accounts.
To measure success in accounts receivable, use a Performance Metric called Days Sales Outstanding.
Days Sales Outstanding, or DSO, shows you how efficiently you are managing your collections. The calculation works like this:
Days Sales Outstanding = Accounts Receivable Balance divided by Average Daily Sales
Let’s look at an example of how to calculate Days Sales Outstanding:
- Accounts Receivable = $600,000
- Average Daily Sales = $20,000
- Days Sales Outstanding = 30 Days
This tells us that on average it takes 30 days to collect on a sale. If we have extended credit terms to our customers of 30 days, this would seem about right.
However, if we have a mix of credit terms (Cash on Delivery, Net 15 days, etc.) the 30 day collection time-frame may be an indicator of slow paying customers. Slow paying customers means a drain on cash flow and an opportunity for improvement.
Wrap Up + Action Items
Train your team on the proper collection techniques: Regular monitoring of accounts receivable balances and consistent follow-up with customers.
Use a Collection Scorecard to measure, monitor and improve accounts receivable.
An improvement in Days Sales Outstanding will have a direct and immediate positive impact on cash flow.