“Measuring, Monitoring

and Managing the

Credit Department” ©

Presented by: Jim Menard, C.C.E.

email: sugarpine@charter.net

CMA Business Credit Services

You can’t manage
what you can’t
measure

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If there is one thing that credit
executives agree upon, it is that they
cannot agree on which measures to use

The person with the most authority

usually dictates the measures to be
reported to management.

Even though we report to management,

most of us like to track other measures
to "see how we are really doing."
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The purpose of this presentation is to
serve as a reference guide and
provide you a collection of
performance measures used.

Dynamic credit executives plan and

direct the credit, collection, and
accounts receivable functions to
increase sales and profits. Using
valid measures of performance is
critical in this process.

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Most of the measures that are currently in
use have value. Unfortunately, they also
have some flaws. The challenge is to
understand the individual measures and
use them accordingly.

The credit professional will have a clear

understanding of the individual measures
of performance and implement the
appropriate measures to meet the needs
of their organization.

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 What Makes A Measure
Meaningful?
A meaningful measure fills a need
and meets a specific objective. If a
measure does not accomplish a
purpose, don't use it.
If a measure is being used and the
objective is not understood, figure it
out.
All productive activity has a purpose.
Meaningful measures will support the
organization's mission and help
reach organizational goals. 6
What Is The "Right" Measure?
The right measure is the one that meets
your organizational needs.
To determine if a measure meets your
organizational needs, logic dictates that
you must first understand those needs.
Once your needs are understood, you
must then identify the most appropriate
measure to meet them.
This requires a thorough understanding of
what the measure expresses.
The right measure will express a value
that complements and supports the
objectives of the company, division,
department, or subgroup.
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Using Appropriate Measures of
Performance Can Help:
Identify areas of expertise
Improve policies and procedures
Shorten lead time
Reduce customer complaints
Improve financial performance
Focus employee training and support
Reduce costs
Perform fair individual and group
evaluations

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Using Appropriate Measures of
Performance Can Help:
Identify areas of potential growth
Reduce errors or defects
Increase customer satisfaction
Increase customer retention
Improve employee morale
Increase productivity
Increase cash flow
Reduce bad debt
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 The following questions will help you
determine if the right measure is being
used:
What does the measure express?
What do the results of the measure indicate?
Does the measure support the objectives?
Is the measure valid?
Is there a more valid measure that should be
used?
Does the use of the measure's results comply
with organizational goals and values?
Should the measure be used independently or in
conjunction with other measures?
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 Days Sales Outstanding (DSO)
Definition: This figure expresses the
average time in days, that receivables are
outstanding. It helps determine if a
change in receivables is due to a change in
sales, or to another factor such as a
change in selling terms. An analyst might
compare the days' sales outstanding with
the company's credit terms as an
indication of how efficiently the company
manages its receivables.

Formula: Ending Total Receivables x

Number of Days in Period Analyzed
Credit Sales for Period Analyzed 11
 Sample Data
Sales A/R Bal Current 31-60 61-90 90+

Jan $ 3,400 $6,210 $3,350 $1,800 $995 $65

Feb $ 3,600 $6,015 $3,555 $1,600 $800 $60

Mar $ 3,900 $6,325 $3,650 $1,750 $855 $70

$10,900
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Days Sales Outstanding (DSO)

$6,325 x 90 days / $10,900 = 52 days
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 Best Possible Days Sales Outstanding or
Average Terms Based on Customer Payment
Patterns
Definition: This figure expresses the best
possible level of receivables.
This measure should be used together
with DSO. The closer the overall DSO is to
the Average Terms Based on Customer
Payment Patterns (Best Possible DSO), the
closer the receivables are to the optimal
level.
Formula: Current Receivables x Number of
Days in Period Analyzed
Credit Sales for Period Analyzed
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 Sample Data
Sales A/R Bal Current 31-60 61-90 90+

Jan $ 3,400 $6,210 $3,350 $1,800 $995 $65

Feb $ 3,600 $6,015 $3,555 $1,600 $800 $60

Mar $ 3,900 $6,325 $3,650 $1,750 $855 $70

$10,900
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Best Possible Days Sales Outstanding or Average

Terms Based on Customer Payment Patterns

$3,650 x 90 / $10,900 = 30 days

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 Sales Weighted DSO
Definition: This figure expresses the average
time, in days, that receivables are outstanding.

Formula: ((Current Age Category / Credit Sales

of Current Period) + (1 to 30 Day Age Category /
Credit Sales of Prior Period)+(31 to 60 Day Age
Category / Credit Sales of 2nd Prior Period) + (61
to 90 Day Age Category / Credit Sales of 3rd Prior
Period) + (91 to 120 Day Age Category / Credit
Sales of 4th Prior Period) + (etc.)) x 30

Note: There are several formulas to calculate

Sales Weighted DSO. This is a simple expression
of those formulas.
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 Sample Data
Sales A/R Bal Current 31-60 61-90 90+

Jan $ 3,400 $6,210 $3,350 $1,800 $995 $65

Feb $ 3,600 $6,015 $3,555 $1,600 $800 $60

Mar $ 3,900 $6,325 $3,650 $1,750 $855 $70

$10,900
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Sales Weighted DSO

3650/3900 = (.936)
1750/3600 = (.486)
855/3400 = (.251)
70/3200 = (.022)
= 1.695
1.695 x 30 = 50.8 or 51 days
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 True DSO
Definition: The accurate and actual number of
days credit sales are unpaid.

Formula: Number of days from invoice date to

reporting date x (invoice amount/net credit sales
for the month in which the sale occurred) = True
DSO per invoice.

The sum of True DSO for all open invoices = True

DSO per total accounts receivable.

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Delinquent DSO or Average Days
Delinquent

Definition: This figure expresses, in days,

the average time from the invoice due
date to the paid date, or the average days
invoices are past due.

Formula: DSO minus Average Terms

Based on Customer Payment Patterns
(Best Possible DSO)

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 DSO = 52 days
Best Possible DSO = 30 days

52-30 = 22 Average Days Delinquent

Note: a lower number is considered desirable –

this measure retains a sales bias and may not give
a true picture of performance.

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 Collection Effectiveness Index
(CEI)
This measure shows the effectiveness of
collections over a given time period.

Formula:
1-{total past due receivables /
(outstanding A/R from the prior month +
current month’s sales) x100}

Website: www:crfonline.org for an example

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 Sample Data
Sales A/R Bal Current 31-60 61-90 90+

Jan $ 3,400 $6,210 $3,350 $1,800 $995 $65

Feb $ 3,600 $6,015 $3,555 $1,600 $800 $60

Mar $ 3,900 $6,325 $3,650 $1,750 $855 $70

$10,900
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1 – {1750+855+70 / (6015+3900) x100 }

1- (2675 /9915) x 100 =
1- .2698 x100 = 73.02 %

The closer to 100% the better – the result

is affected by a rise or fall in sales. 21
Prior Month's Past Due Collected

Definition: This percentage

expresses the amount that has been
collected in the current month of the
prior month's past due amount.

Formula: 1 -Current Months Past

Due Age Categories
Beginning Receivables of Prior Month
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 Sample Data
Sales A/R Bal Current 31-60 61-90 90+

Jan $ 3,400 $6,210 $3,350 $1,800 $995 $65

Feb $ 3,600 $6,015 $3,555 $1,600 $800 $60

Mar $ 3,900 $6,325 $3,650 $1,750 $855 $70

$10,900

1-(1750+855+70 / 6015) = 1 - .445

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Equals 55.5% Prior Month’s Past Due

Collected

Note: should be used in connection with

other measurements since it focuses 23

heavily on past due accounts.

 Percent Over 61 Days -- or
Percent of Any Age Category

Definition: This figure expresses the

percentage of Total Receivables that
is 61 Days or more past due.

Formula: Sum of the 61 Days and

Older Categories
Total Receivables
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 Sample Data
Sales A/R Bal Current 31-60 61-90 90+

Jan $ 3,400 $6,210 $3,350 $1,800 $995 $65

Feb $ 3,600 $6,015 $3,555 $1,600 $800 $60

Mar $ 3,900 $6,325 $3,650 $1,750 $855 $70

$10,900
15

855+70 / 6325 = 14.6% over 60 days

past due.

Can be measured for any of the aging

buckets… e.g. % over 90 compared to
total A/R. 25
 Bad Debt to Sales

Definition: This expresses the percentage

of credit sales that were written off to bad
debt. A lower percentage signifies that
effective credit policies and procedures are
employed.

Formula:
Bad Debt Net of Recoveries
Credit Sales
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Bad Debt for the Period = $ 115
Credit Sales for the Period = $10,900

$115 / $10,900 = 1.055%

Department Goals was 1%

Over by .055 % (or $6)

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Active Customer Accounts per Credit and
Collection Employee
(Total Department)
Definition: This figure represents the
total number of active accounts per
department employee. Generally, the
higher the number of accounts per
employee, the more efficient the use of
technology and people. (This is a
departmental measure.)

Formula:
Number of Active Customer Accounts
Number of Total Department Employees
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Number of Active Accounts = 36,320
Number of Employees = 33

36,320 / 33 = 1101 active accounts

per employee

Down from 1200 last period

equals
Lesser workload per employee

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Operating Cost per Employee

Definition: This figure represents

the total dollars spent per employee.
The lower the cost, the more
effective use of technology and
people.

Departmental Operating Costs

Number of Department Employees
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 Cost per Sales Dollar
Definition: This calculation relates dollars spent
in the credit and collection effort to credit sales
generated, or how much it cost the company to
process each dollar in credit sales. A higher
percentage signifies that a more effective
operation is employed:

Formula:
Departmental Operating Costs
Credit Sales

Is your cost per credit sales dollar good? This

question is relative. It could be answered by
benchmarking with other organizations or
measuring itself against its own past
performance. 31
 Cost of Collections

Definition: This percentage represents

the cost of collecting the collectable
amount of Bad Debt. The lower the
percentage, the more effective the
attorney(s) or agency(s) employed.

Formula:
Amount Paid to Attorneys and Agencies
Collected Amount
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 High-Risk Accounts
Definition: This measure identifies significant
potential bad debt accounts so they can be
collected, thereby maximizing profits by
minimizing losses.
You must set the criteria for your business.
Example: these accounts have at least $2,000
over 60 Days and a total due of $5,000 and the
customer is not paying because of its lack of
ability to pay or some unknown reason for not
paying according to terms. The closer to zero the
more effective the collection effort, the better the
working relationship with the customer and the
more credit, collections, and accounts receivable
policies and procedures are being followed.
Formula:
Number of High-Risk Accounts

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 Other Measurements
Number of complaints per collector
DSO by collector / division
>60 by collector / division
Bad Debt by collector / division
# of calls made by the collector
Aging bucket improvement from / to
DSO step Back Method

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 Other Measurements
New Account turn around time
Credit Memo ratio
Dispute management cycle time
Bad Debt as a % of Sales
Adjustments as % of Sales
Cash Collection forecast accuracy
% Collected of the beg A/R

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 Other Measurements
Kaizen – “continuous improvement”
narrow focus on a specific area of a
process with a quick turn around
time

Six Sigma – see Nov/Dec 2005

Business Credit Magazine for details
“provides the techniques and tools
to improve… any process”
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 Results
Accordingly: “companies that
correctly implement and
manage their metrics… can
achieve up to 30% reduction
in DSO and 25% reduction in
transaction costs”.

Business Credit Magazine 11/05

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 Q&A
Your time to ask the questions

Remember to sign up for the

Western Regional Credit Conference
in Las Vegas on October 17-19

Thank you for participating,

Jim Menard, CCE
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