The credit department and its personnel can be essential to helping a company increase sales, meet corporate goals, and enhance cash flow—but often get overlooked or even ignored as part of the operational process in achieving these critical business elements.
One way credit personnel can help their organization or company is to incorporate various measurements and metrics to review the effectiveness and efficiency of the credit department. In the produce industry, companies often fail to take advantage of available performance metrics to identify areas where credit functions can be of more value.
Measuring the Effectiveness of Credit Functions
David Vaiz, credit services manager for Driscoll Strawberries Associates, Inc. in Watsonville, CA believes it is imperative to incorporate performance metrics: “The credit department is responsible for one of the key assets of our company, accounts receivable. Measuring our effectiveness helps to ensure that we’re minimizing the company’s credit risk while promoting sales.” Further, he notes, “I strongly believe you can’t improve what you can’t measure.”
Riverhead, NY-based Charles Brown, credit manager for Hapco Farms, LLC, concurs. “Because accounts receivable is such a large asset of our company,” he explains, “I monitor every account on a weekly basis and numerous accounts on a daily basis.”
Credit departments can also play a role in helping a company grow. By evaluating the most successful accounts, patterns can be identified and used to solicit new accounts. Additionally, determining what accounts you want to retain as customers can help fuel profits.
Key Performance Measurements
To help monitor accounts, a relatively standard tool is days sales outstanding (DSO), which helps measure the liquidity of accounts receivable relative to credit sales on an annual basis. To arrive at your DSO, divide accounts receivable by annual sales, then multiply this sum by 365 to arrive at the daily figure.
The DSO analysis provides an idea of the number of days, on average, customers take to pay their invoices. As a rule of thumb, the higher the DSO ratio, the more likely your overall customer base may have credit problems or that many of your customers have slower paying accounts themselves. Conversely, if you have an extremely low ratio it may mean your company’s credit policies are so tight they may be inhibiting possible sales.
Brown says Hapco uses DSO to help monitor trends on accounts and to ensure averages aren’t “going down to the point where it impacts our own cash flow.”
Understanding Trends
Trends can be a key component to understanding your accounts. By monitoring DSO on a monthly basis, you can follow possible seasonality or “peak” periods when customer pay patterns may vary. For example, if a company has traditionally shown a lower DSO in summer months versus winter months, you can better prepare your cash management knowing an account may be a bit slower during certain points within the year.
