Many companies use DSO to measure the credit department's ability
to manage risk to control delinquencies and to resolve customer
deductions quickly. Unfortunately, DSO is a relatively blunt instrument
and is usually regarded as a relatively poor measurement of the
credit department's abilities. DSO is influenced by actions or
decisions made outside of the credit manager's control. For example,
if the sales department offers customers extended dating, DSO will
increase through no fault of the credit department. Similarly,
if the number of errors made in order entry increase, so will the
number of disputed invoices and deductions, and as a result DSO
will also increase. Also, if senior management requires the credit
department to accept more risk [for example, in an effort to increase
sales] then DSO is likely to increase as the amount of credit risk
Better ways to measure the efficiency and productivity of the
credit department include:
DDSO differs from the DSO calculations in that it measures delinquencies
rather than evaluating the entire accounts receivable portfolio. Delinquent
DSO also known as the Average Days Delinquent, calculates the average
time from the invoice due date to the paid date. It provides information
to evaluate individuals, subgroups or overall collection performance.
The advantage of using DDSO to measure the effectiveness of the credit department
is that, at least in theory, the credit department has direct control over
the amount of delinquencies outstanding at any given time. The same cannot
always be said of DSO.
The DDSO formula is: DSO – Best Possible DSO.
The DSO formula is: (Ending Total Receivables Divided by Total Credit Sales)
x Number of Days in the Period.
The Best Possible (Current Receivables / Total Credit Sales) x
DSO formula is: The Number of Days in the Period.