One of the most widely used AR KPIs is Days Sales Outstanding or DSO. It is a measurement of the number of days of sales outstanding based your AR balance at a point in time divided by average daily sales for a year. Everything else being equal, an increase in DSO indicates that your collections are lower and it is taking your AR team longer to collect from customers. A decrease in DSO indicates the opposite.
While DSO is a useful KPI, you need to understand its shortcomings and how those limitations can create difficulties for developing and measuring data driven collections. DSO shortcomings arise from seasonality and sales terms/policies.
Many companies have seasonal fluctuations in sales for a variety of reasons including weather, holidays and industry practices. DSO smooths out seasonal fluctuations by using average daily sales for a year as the denominator in the calculation. This smoothing can mask the true condition of AR, which may be better or worse than the DSO calculation reflects if you look at how many days of sales are outstanding based on actual sales.
Some companies sales terms/practices can also be smoothed over by the average daily sales denominator used in the DSO calculation. These terms/practices could include:
- Extended payment terms or “dating” beyond normal payment terms
- Sales promotions to drive volume
- New product introductions
DSO smoothing can in these cases also obscure the true condition of AR compared to using actual sales in the denominator.
Despite these shortcomings DSO is a very useful KPI if it is used in conjunction with other AR KPIs, and DSO results are measured against benchmarks such as prior history and financial plans. Unusual DSO results should be analyzed to determine if sales were skewed by seasonal factors or sales terms/practices.
PITFALLS FOR DATA DRIVEN COLLECTIONS
If you are trying to improve your DSO KPI by using data driven collections, you will find there are pitfalls that can frustrate your efforts.
Data driven collections are based on the premise that KPIs can be changed by influencing customer behavior by the way your AR team interacts with them. A/B testing is used to determine which collection practice is more successful in influencing customer behavior for the desired change in KPI.
The pitfalls of relying on DSO for data driven collections are that the external factors of seasonality and sales terms/practices can:
- Make it difficult to structure effective A/B testing
- Produce misleading results
The test groups chosen for A/B testing need to be selected if possible for the same terms, sales practices or seasonal factors. Unusual DSO results need to be analyzed for comparability with benchmarks or recalculated using actual sales.
Data driven collections will help to achieve collection KPIs and improve collection processes. The key is to work with a software partner who understands how to structure A/B testing.
Lockstep Collect is a market leader in cloud-based credit and collection platforms. Lockstep Collect can help you with the A/B testing needed for data driven collections.
If you would like to learn more about how you can benefit from data driven collections, please contact Lockstep Collect at www.lockstep.io.