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Reduction of Accounts Receivable (DSO)

Six Sigma – iSixSigma Forums Old Forums General Reduction of Accounts Receivable (DSO)

Viewing 18 posts - 1 through 18 (of 18 total)
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  • #31521

    Norbert
    Participant

    Who doesn’t dream about getting his money faster from his customers? Well, senior management does now – out loud. They suggest to setup a 6S project to reduce the average Days of Outstanding Sales from 40 days to 30 days. Great project? Until you start digging a little deeper. 
    First, what is the defect? A customer who has been granted more than 30 days to pay? What if that is the deal: take it or walk. I can already hear the account managers when I am probing for Xs: “Do you want to sell or not ?”
    So, before digging any further…If there is anybody out there that has any information or suggestions to share (I don’t want any proprietary information, though) on the same subject: here is somebody that is going to need all the help he can get before being thrown to the lions…
     

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    #83159

    Kealan
    Participant

    There are 3 clusters to consider, Sales Terms, Disputes & Deductions, and Deliquencies.You need to identify which of the above is causing the most pain. If deliquency is your problem, this can be broken down to credit/sales policy & enforcement, or customer/ supplier alignment, i.e.timing between invoice date & receipt of goods at the customer. Difference between the check/payment date and the date that the payment is processed in your accounting system. Sales terms would look at your std terms & the process of granting extended terms, also how can terms be reduced without losing the sale.

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    #83162

    Norbert
    Participant

    Thanks Kealan, for your reply.
    We already has a past due reduction project and now have less than 5% paying beyond the due date. Also, I am not aware of a lot of issues – credit memos are below 2%. So, the real focus now will be on reducing granted terms to the customers.
    I am not aware of any “standard terms”. It looks like these are largely different depending on the region that we are selling to. The project’s objective is to reduce some 10 days  from  say 45  to 35 days. Would you then say that any customer in excess of 35 days is defectuous?
     
     

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    #83239

    Cone
    Participant

    The inputs from Kealan are good.
    It would not be correct to say that customer above 35 days is defaulting, as long as he is within the credit period granted to him.
    If your company has a policy of credit terms ranging from say 30 days to 60 days (e.g. 30 days for one type of customers, 45 days for another, and 60 days for a third group), proper and more meaningful insight can be gained from analysing DSO for each credit groups rather than chasing an overall measure.
    Such segmented data can also help you to target customers to negotiate the terms to further drive down the DSO.
    It would also pay you to look in details at your systems which process the invoicing and receipts. There can be some customers where the payment terms are like 90% within 30 days and balance 10% after commissioning. How does your system handle this kind of ageing ?  Having even 3-4 major accounts like gives a big impact on your ageing and DSO.
     Though you don’t seem to have a material amount of overdues, it would be beneficial to install tracking and reporting systems which can evaluate the outstandings at sufficiently small intervals of time, so that the outstandings and overdues which miraculously come down towards month and quarter ends, do not bloat during the intervening periods.
    Another issue which can confound your data is unapplied receipts, credit memos, etc. These also need to be cleared up within a suficiently small time window.
    Period end pressures to sell also tend to bloat receivables when they mature. Therefore, if shipments are evened out during the month/quarter, this problem can be avoided, leading to a more stable DSO performance over periods of time.
    Regards.
     
     
     

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    #83241

    Kealan
    Participant

    DSO’s are a good place to start, but you could also look at DTP (days to pay) – this measures time to pay from invoice date to payment date per invoice. Calculate the average DTP per customer & do a perato to focus on accounts that are paying later than others. You could then analze by region, by sales rep or product to focus on the key issues.
    You could also measure DBT (days beyond term), the difference between payment date & due date – this would identify invoices that have been paid late.
    The downside of these measurements are that it looks at closed invoices only.
    Regards

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    #83269

    Ronald D McRaney
    Member

    Norbert, do you have in place a discount for early payment?  Reducing terms will be more palatable if you have some incentive in place.  Also could track discount at early stages of the investigation.

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    #102330

    McNabb
    Participant

    Just did a search on A/R and hit this question you had back in Feb ’03.  If you have completed this project, I would be interested in what your findings and learnings were, as well as your success if any, as I am starting a project on the same thing.

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    #102480

    Norbert
    Participant

    Yes – month-end past due dropped from 25% to 5% – still as of today. Let me have your email address and I will send you some details.

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    #102509

    McNabb
    Participant

    Thanks Norbert, please send to me at this address, then if I have questions I will reply to you from my work address… or you can call me if it is convenient.  I am in Tennessee, USA.  423 -229 – 8944, and I will give you my work email over the phone.  Email for now is
    labailey @ chartertn.net

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    #103021

    Bonghanoy
    Participant

    Hi Norbert, I am starting a project to reduce DSO next week. Would you share your findings with me as well?
    I look forward to hearing from you..and if you’d rather me call you, just let me know.
    Regards,
    Karen
    678-291-7468

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    #110018

    Keren
    Participant

    I am working on a collections Lean Thinking project and could use the information as well.
    Thanks
    kerenm @ kingdominc.com

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    #113950

    Fontanilla
    Participant

    I am starting a six sigma effort to reduce DSO and would like to learn  what you did to get these gains.

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    #113951

    Fontanilla
    Participant

    Karen:
     
    I am starting a DSO reduction project and see you are about 6 months ahead of me.  Any insights that you are willing to share?
     
    Dan –  708-873-2573

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    #114433

    Savage
    Participant

    I likewise am interested in anything anyone has concerning projects conducted in Accounts Receivable.  I have already worked on several projects in the A/R area. 
    We have looked at Credit Release Decisions, where we identified credit release reasons.  I measured the days to pay performance on past credit release decisions and will compare the days to pay on decisions made after the improvements are implemented.
    We have also looked at the credit decisions made when setting up a New Account.  The trouble with this project is that many of our accounts have their credit subsequently affected by other people’s decisions thereby overriding the original credit assessment made.  So far we have not identified a good metric for this.
    We’re also looking at the throughput of New Account applications.  We have a 20% error rate on incoming applications.  We’re looking at electronic applications to reduce this error rate.  By improving the error rate, we hope to increase the amount of applications that can be handled by the same or less people.  The metric is dollar cost per application processed. 
    We’ve also looked at what is causing Credit Hold situations with our customers.  If there are no collection issues on the account, then we shouldn’t be receiving the credit hold call in the first place.  We’ve had limited success here since we’re trying to address the credit holds without changing the overall credit policy.  The metric we used is the number full-time employees given the volume (requires knowing how many calls an employee can handle daily).
    Yet another project is looking at what types of Mailings you’re sending your customers.  Some do not add value, such as statements.  We saved over $200,000 by eliminating 80% of our monthly statements to customers.
    Hope this is helpful.

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    #115419

    Eldrie
    Participant

    I could use some reduction tips as I am on a project trying to address ways to improve DSO.

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    #117307

    walden
    Participant

    Dan,
    Did you receive anything from your posting? If so, could you share what you were able to gather on the DSO project.

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    #117309

    Fontanilla
    Participant

    Chris:
    Only got limited feedback, but I would welcome a discussion on the topic if you want to call.
    Dan Warner
    (708) 873-2573
     
     

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    #144151

    VJ
    Member

    Hi Norbert-I am tasked to mentor a project about reducing DSO.  Can you possibly share your completed project? I would appreciate it very much.  By the way my email add is [email protected].
    thanks in advance…..

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