I know I’ve talked a lot about delving into Key Performance Indicators for working capital management, especially A/R. It’s great when companies benchmark internally and externally to look for ways to improve their businesses. However, it’s also important to keep a few things in mind when you do this:
1. Deriving a global DSO figure from publicly available financial statements can be misleading. After all, global companies typically have different terms and trade practices in different regions around the world. So the aggregate DSO calculated from the SEC filing, might be skewed by DSOs extended by 100 days in East Asia. So when this is compared to industry benchmarks, this may look like a dire situation, but in reality the region specific DSO may be right in line with the average. Metrics need to be compared to reasonable benchmarks for industry, region, etc… not always a global benchmark.
2. Take a portfolio view of your A/R balance. Some key measures to look at are % A/R current (within terms) and % A/R beyond 90 days. It’s pretty much a given that if your receivables go long past 90 days, they are in serious jeopardy of being written off.
3. Collections Effectiveness Index (CEI) is one great measure of your credit and collections team’s productivity. It shows how fast your collectors are converting outstanding A/R to cash.
4. Look at DSO in the context of the complete Cash-to-Cash cycle. Working capital gets tied up in the nooks and crannies of your company’s cash cycle. Viewing DSO in comparison to Days Supply Inventory and DPO will give you an idea how your cash flow is materializing. Also, some key insight can be gained by comparing average A/R balance to sales for a specific time period. This helps to gauge your company’s cash conversion efficiency.
Bottom line: There are a lot of A/R metrics to examine and they can all be helpful. Just keep in mind that in order to fully diagnose your company’s cash flow condition, you may have to look at multiple metrics and come up with a composite assessment of working capital management.
Comments