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Credit Management: Setting Up DSO Targets
Published by slang March 28th, 2006 in Credit ManagementCLICK THIS TO GO TO THE MAIN PAGE ON ALL ARTICLES ON CREDIT MANAGEMENT/CREDIT CONTROL
Setting DSO target for Cash Collection
What if my director said to me, “I want you to achieve only 70 Days Sales Outstanding for this coming month September 2005.” How then do I calculate the cash required to achieve 70 DSO?
Illustration:
Assuming that for August 2005’s DSO is 75 days and the scenario is as below:
| August’05 | 31 days | Sales value $1,500,000 | |
| July’05 | 31 days | Sales value $1,000,000 | |
| June’05 | 13 days | Sales value $ 650,000 | (out of total sales of $1,500,000 x 13/30 ) |
| Total | 75 days | $3,150,000 | Receivables |
To achieve a target of DSO for 70days for September 2005, I need to:
(a)take September 05 sales as intact 30DSO
plus
(b)whole month of August 2005 sales alone 31DSO
and leave
(c) another 9 days sales in July 2005. 9DSO
———–
70 DSO
++++++
So, my collections should be:
(i) to collect all outstanding receivables remaining in June’2005 (13 DSO) $650,000
(ii) to collect 22 days of receivables of July’2005 (22/31*1,000,000) $677,420
Grand Total Collection to achieve above-said 70 DSO $1,327,420
+++++++++
Well what if I cannot make it?
I then need to be more aggressive in the collections for the old debts or from litigation cases. This should help me to achieve the desired DSO.
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