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.
Woa their, slow down Graham you have started to loose me already!! OK, OK let’s start at the beginning and work up to what I mean.
Every company that gives Credit need to chase for payments, right, but it’s how you do it that’s important. In my last article I explained about the education process to get payments in quicker. 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 and sell, sell, 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!
And that’s when you might go running to the bank, now only a few years ago that was an option, and the chances of success were pretty good in securing that overdraft facility or bank loan. We know that’s not the case now, any discrepancies relating to your personal or business credit history will see your bank saying ‘No’, sorry Mr Simpson, we have had a look, and at this time we cannot support you……cheers, thanks, why did I bother.
Perhaps their is a lesson to be learnt in that – check your credit files before you go to the bank and regularly check them, at least every three months.
Now going back to my first paragraph, before you go running to the bank, do some internal business checks. For instance, and ask yourselfhonestlydo you do this!
- 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 customers premises?
- Do you have a procedure for collections?
These and more need to be answered, let’s face it we went into business because we wanted to live the life we wanted and to make some money in the process……if you don’t do this, your life style will go down the pan and you will loose money, not make money.
So, go onto the Amril website and click onto the DSO Calculator. You don’t have to sign in, just have your turnover handy, how many invoices you have outstanding and if you have a loan or overdraft facility take the interest rate down as well, that’s all – the calculator will do it all for you AND it will give you an understanding of how long it takes your customers to pay you. This is an essential starting point.
The DSO does is measures the efficiency of your collection process, their is even a video to explain how you can use it. This is a great Key Performance Tool and every business that gives credit must know their own DSO.
So for instance you give credit out at 30 days date of your invoice, but your customers average payment performance is at 65, Wow, over double the terms that you agreed too. This is the time you wish you where a bank! As the video will explain if you reduce the days, you increase cash flow, and if you happen to use an overdraft facility, because you have increased cash flow you may not need to use the overdraft facility as much or not at all. BINGO, it’s not as simple as that but it does give you a good starting point.
Once you have this information, you will need to set up a process to increase your cash flow. I will go into this at a later stage, but let’s start with the easier piece of the puzzle first. Good Luck!