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As mentioned in my earlier articles, Top management must review and reinforce the importance of certain measurements used in Credit management.. What are they?

Measurements in Credit Management includes the following :

1. Days Sales Outstanding (DSO)
2. Aged analysis of Overdues,
3. Overdues as a % of Total debtors,
4. Disputed Debts (including Debit notes ) as a % .

For the methodology and computation of DSO, please refer to my article on Cash Conversion Cycle, We shall now discuss the following usefulness of using DSO as the measurement in Credit Management.


1. Days Sales Outstanding:

We must not narrow ourselves by thinking that DSO can only be apply to a company. The following illustrations show otherwise.

In fact, we can create a “football league” table using DSO which will assist us to narrow down to the model champion or the culprits..

DSO: By Company or By Total Group

DSO: By Department or By Overall Company

DSO: By Salesperson or By Salesperson Group

DSO: By Projects

2. Aged Analysis of Overdues:

Use to calculates the quality of overdues. Ideally, overdues should only be restricted to 1-30 days. However, this is really not possible, hence we need to understand whether the overdues are improving or deteriorating by reviewing the overdue ageing analysis schedule:

Assuming total debtors totaled $3,000,000 of which $1,000,000 is current (1-30days). The remainder of $2,000,000 is overdue. Therefore, we need to analyse the $2,000,000 into further ageing bucket like for the following example:

Total overdue 1-30days 31-60days 61-90days 91-120days 121+days

$3,000,000 $1,000,000 $500,000 $300,000 $200,000 $1,000,000

3. Overdues as % of total debtors:

Just a calculation of the value of Overdues as a% of total debtors at a certain cut off say month end.
It is important to combine this overdues as % of total debtors and further break down into an Aged analysis of overdue schedule in order to make these two ratios more meaningful.

4. Disputed Debts

We must not underestimated disputed debts in credit management. Usually, these disputed debts will clogged up the cash in flows of the company. Always split up the total debtors by taking this disputed debts and then re-analyse the disputed debts as a % of total debtors and also as a number of days sales unpaid. Normally, these disputed debts are in the form of debit notes claim. Ultimately, once resolved, might be credited/deduced eventually from the amount owing by the debtors.

Other reports which assists in measurement of the progress of cash collections from trade debtors are as follows:

• Daily cash collection report: actual versus target,
• Summary of trade debtors by Department manager and by salesperson
• Summary of trade debtors by salesperson only

A Sample of Daily Collection Report to monitor cash collections for Companies with Branches:

CASH COLLECTION : ACTUAL VERSUS TARGET

We can actually summarized a trade debtors report to be presented to Top management which is as follows:

It is crucial that Senior management should consistently and constantly review the progress of credit management vide the aforesaid measurement or key performance indicators as this will inevitably affects the company’s Return on Investment Ratio ( ROI).
By getting the debtors to pay earlier will enhance ROI as:

• The investment in trade debtors is reduced,
• The returns or income is increased by lessening the interest cost of borrowing to finance debtors

Any provision or write off of bad debts will reduce the net income of the company.

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Related Entries

• Credit Management:What is the KPA and KPI of a Credit Manager?
• Credit Management: Setting Up DSO Targets
• Credit Management: An Overview, its Importance and Characteristic of a Company having a well run credit management department
• Credit Management: Costs in Extending Credit & ROI on Receivables
• Cash Conversion Cycle: Methodology and Computation