BAD, BAD DEBTS!

Journal 1/2015

DSO is a good indicator of the efficiency of sales receivables management

Kimmo Kauranen, Vice President, O2C Business, Opus Capita, urges companies to beat lazy money out of its hiding places and into action. The financial markets have changed for good and demand efficiency from all financial processes. DSO (Days Sales Outstanding) is a good indicator of the efficiency of sales receivables management.

“Most companies know about financial difficulties. Despite this, they monitor their bad debts passively and have an overly tolerant approach to late payments. When a receivable has been outstanding for more than 90 days, the likelihood of receiving the payment declines day by day. The proportion of these types of invoices in companies is worryingly high. Risky receivables remain below 2% of net sales in only a few percent of companies.”

Ensuring that receivables are paid is not just the financial department’s territory, the sales department also has a significant role. Bad debts can make up to 1% of net sales. Put simply, you could say that by selecting poor customers or contracts, sales personnel are responsible for a cost that approaches the 1.7% share of net sales that, according to a study by The Hackett Group, a good company pays for its financial management in a year.

Overly long payment terms offered with the aim of increasing sales, or material purchases that are inexpensive but unnecessarily large, also increase working capital and weaken company finances. Therefore it is important for a company’s financial processes to be developed as end-to-end processes to ensure that sales, acquisitions, production, and the other operations that affect the financial result, are involved and understand how their actions affect the company’s finances.

Here are 10 ways to optimize sales receivables management from the perspective of customer satisfaction and money turnover:

• Optimize the service process: eliminate unnecessary phases, standardize procedures globally and locally.
• Consolidate invoicing by products and deliveries to ensure the success of reconciliation.
• Eliminate manual invoices – they are very expensive.
• Minimize and centralize internal invoicing. This will help reduce the number of invoices and avoid currency risk.
• Ensure that all deliveries are actually invoiced.
• Closely monitor the process.
• Draw up clear KPI targets and monitor their achievement.
• Minimize the number of small invoices and various invoice formats.
• Where possible, use electronic ordering (EDI) and portals for processing orders and invoicing.
• Shorten the length of time between order registration and invoicing.

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READ MORE in OpusCapita Journal 1/2015: READY, STEADY, GO! It’s time to mobilize idle monay in operations! [add a link to the Journal article file “Journal-1-2015-working-capital-web”]