Covering Business Credit Logo Home   About Us   Services   Credit Articles   Q&A   Contact  

  Business Credit Articles  

Credit Risk Analysis
All Articles •  Home

Advantage of using DDSO to measure the effectiveness of the credit department
by Michael C. Dennis, M.B.A., C.B.F.

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 increases.

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 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 released].

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 necessary 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.

Share |

Business Credit Articles
Send to a Friend
Ask A Credit Question
Questions & Answers
Business Credit News
Your Privacy
Site Map