the economy and DSO

I recently read an article, Accounts not receivable, that provided the following factoid:

A recent survey of large public companies in America … shows that “days sales outstanding” (DSO) - or the number of days it takes companies to collect money owed to them, often by other firms - hit an average of 41 in 2007, up from 39.7 in 2006. That might not seem a big increase, but the indicator has rarely risen or fallen by more than half a day a year. When America went into recession in 2001, DSO averaged 38.9.

The Economist, print edition, September 6, 2008

A while back I wrote an article about how to calculate DSO and the question was related to finance efficiencies (e.g. collections efforts) and customer satisfaction. What made The Economist article interesting was its tie in to the overall economy.

As we all have noticed, the world economy is slowing now. As worldwide sales begin to stagnate a bit firms will move in to the ever popular ‘vendor management’ stage of cash management by delaying payment to vendors for as long as they can. This action will increase DSO (e.g. the number of days to collect is longer) and, as the article suggests, put a lot of pressure on in-house collection efforts. The article also suggests calling in collection agencies a lot sooner and, if I take it one step further, you may even consider selling your receivables to get money even faster!

What does all this mean for the ‘little guy’?

This article was primarily about large public companies (it is The Economist after all) but it is a good heads up to stay particularly diligent on your collections efforts. When invoices hit ‘past due’ it is time to hit the phones right away because for small companies, Cash is King! We don’t have the luxury of having large cash positions to cover us while collections efforts are delayed. So, remember:

The wheel that squeaks the loudest is the one that gets the grease.

Don’t be afraid to make those collections calls!