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Limitations of Using DSO to Measure Credit Department Performance
By Kym Price

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

Other ways - possibly better ways - to measure the efficiency and productivity of the credit department include:

  • Calculating days delinquent sales outstanding.

  • Measure DSO after deduction of large dollar deductions caused by operational problems and errors made by your company, the seller.

  • Calculating the average cost per invoice to maintain the credit function.

  • Measuring the average amount of time required to open a new account.

  • Determining the average number of days an invoice is past due before a customer is called about payment.

  • Calculating the frequency of follow up on past due balances.

  • Determining the average length of time orders are in the credit queue before they are reviewed [but not necessarily approved and release.

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