Are You Interpreting DSO Correctly? Tips to Leverage DSO to Fasttrack Collections

[0:00] Monica:

Welcome, everyone. Thank you for joining today’s session on how organizations commonly misinterpreted DSO and how to analyze it properly. This is a difficult word to say when you are not English or American. Let me introduce you to the speakers today. So Lhoist is a primary leader in minerals and adult line production, and today we have three speakers from last. James Robinson is a treasurer, Alicia Geades is a credit manager, and Bernardo Aguilar is AP/AR manager. I will leave you guys on the stage.

[0:41] James Robinson:

Thank you very much. So welcome today. Talk about a couple of things here today. But mostly about DSO. A little bit about the last before we started out. As she said, Monica said we are a leader in line and make roles, global presence headquartered out of Belgium, our LA or North American headquarters are here in Fort Worth very close to us. So, we’re local crew today. So, we manufacture lime, which is manufactured by mining limestone, and then calcining it or burning it to make calcium oxide, which is what you know is lime. So, used in a myriad of products, you touch it every day, whether you know it or not, it goes into steelmaking, paper production like powerplant, remediation for emissions. So, it really touches your life every day, and it’s just in the background. So, in a case, about $2.2 billion in revenue, about a third of that is here in the States. So, an important part.

[2:04] James Robinson:

So the collections dilemma, is cash always the most important thing getting cash in as quick as you can? Is that the most important? Or is the customer experience that that’s the most important thing. I think for a lot of different companies, you have to strike some balance. So if cash is king, you probably have poor customer experience, you’re always going to be contacting them, even though they’re going to pay on time. Maybe you’re hounding them or something like that. And there’s always going to be a struggle there. So kind of difficult to manage in that manner. But, you know, do you want to be the ultimate customer experience either do you always want to give in on everything? So, you know, I think there’s some balance we had there and we’ll talk about sort of strategies to achieve that balance.

[3:07] James Robinson:

With that, I’ll turn it over to Alicia. Hi there.

[3:10] Alicia Geades:

I’m Alicia Geades, and I am today the senior manager of credit and customer support. So that’s a little bit different than I would have told you a few months ago actually. I was the credit manager at last North America, and we’re making a move in our organization to really kind of encompass the order to cash we’re a little bit in mature in order to cash the full spectrum of it. But today, we talk more about that customer experience that Jim was James was just referring to, and how it really impacts everything we do impacts the customer experience, even sending them an invoice, right. So we’ll talk about a little bit about collections. If you think about the collections process when that is not streamlined. What are you doing? You’re focusing on chasing your old extremely aged balances and not really able, in most cases, to be proactive. So, you know, how are you successful if all you’re doing is kind of chasing your tail, right? So we have been through a lot of debate about what is our collection strategy, and definitely determined that not the same size collection x strategy does not fit, all right? It doesn’t fit all organizations.

It doesn’t fit all regions, it doesn’t fit all customers. So, I don’t know what just happened there. So what do you talk about with different customer profiles? You know, when you look at the customer profile, are you looking at just primarily their industry? Are you looking at how they are maybe paying you so looking at your aging buckets, right? Looking at maybe the geography they’re in and, you know, maybe some of our Latin American customers are used to paying in longer terms than some of our US-based. So there’s a lot that goes into that as well as how creditworthy so if you have a high-risk customer, are you going to try to touch them sooner and remind them to pay you? Or are you going to let that ride? We have complex customer segmentation at a loss. Lots of strategies that we’ve tried to build into our collection system we’re going to SAP we have SAP ERP, and we are utilizing the FSCM collections module. Then looking about how that really affects DSO right, so companies can look at DSO as the end all be all that really is that what you want to do. Do you want to focus on hitting that metric at all costs? Or do you want to think about your customer segmentation? What can you do to try to facilitate that payment sooner? While At the same time, creating a great customer experience. Additionally, looking at the calculation of DSO, so are you speaking the same language? We do a monthly DSO based on 90 days average sales, while our parent in Belgium likes to see a different calculation. So internally, you know, we’re tracking one DSO while we’re reporting a little bit different numbers to our parents only because it’s the calculation that they prefer across all their regions. So it’s important to sort of speak that same language, what is your DSO calculation? And is it the right fit for what you’re doing? So let’s talk about factors affecting DSO.

There’s a lot that goes into that. Extended payment terms, obviously. If you are extending those payment terms out, clearly, that’s going to drive up your DSO. It’s a balance for sure. And what we talked about earlier is that customer experience more and more today, we’re seeing customers approach us and say, these are our terms. Thank you very much. And then we have to say, Oh, wait a minute, please, you know, let’s negotiate. So it’s important to keep an eye on that. What is your best possible DSO? And how close are you able to achieve that? As well as industry standards talk about, you know, we sell into Sanitary Ware in Latin American countries, and typically those customers pay a lot slower than you would expect of US customers to pay. So keeping that in mind that if we have the initiative to drive up business in a certain industry, what is that going to do? What’s the impact going to be on DSO? And you know, if DSO is an important metric that everybody’s tracking, being able to, to budget that piece or look at it long term and know what factors are playing into it. Extension of payment terms by sales is my favorite subject. The handshake back of the napkin deal that’s kind of done, you know, without the involvement of credit.

[8:01] Bernardo Aguilar:

I did it ever happened? No, no, no.

[8:04] Alicia Geades:

No. I am proud to say though that, you know, relationships are so key there. If your sales group is comfortable with the credit group and has confidence, it seems that a lot of those deals happen less and less, and they’re more willing to come to talk to you ahead of time. Information is key, right? So if you know about this sales gift of extended terms to a certain customer or certain time, but at least you can budget for it, you can say hey, I know that my DSO will be affected in the coming months. It’s still not okay, salespeople. I don’t know where the salespeople are. Discrepancies in billing. So this is a big one that we have tackled over time; we just did a presentation on cash applications. And now, like I was saying, I have the customer support group under my umbrella and I’m going to have been able to have an impact on customer invoicing. So it’s really a great kind of holistic approach to think about the importance of that original order going into this system and the accuracy of the invoice that it’s going to generate and the effect on DSO, as well as the deductions and dispute. So faster resolution of those obviously will have a better impact on DSO. And this is a lesson that we had to learn is really identifying our customers that may want to dress up their balance sheet at a certain close, close period. So quarterly, maybe we have customers that strategically hold their payments because they want the cash, right? So it took us a few kinds of iterations of those close periods to realize why we were having that impact on DSO and what those dollars being held really meant for us. And then we were able to have some conversations and say, hey, it’s okay, you did it. But maybe please don’t do that to us at your end because our metrics matter too. And then seasonal trends. You know, very important. If maybe you have a fast paying customer industry that is only seasonal. Again, obviously, improve your DSO, and they’re buying regularly and paying well, but then when that part of the business maybe drops off, what’s the effect going to be on DSO?

[10:14] Monica:

All right, so I can-

[10:20] Bernardo Aguilar:

Good morning. I’m Bernardo Aguilar. I’m currently the AP/AR manager. At last, I was hired to do the cash applications tool and, therefore, eliminated a lot of time after the implementation of that. I’m now doing AP goes. So three things to check while you’re analyzing DSO is a very important right to have a good collaboration, communication lines of communication between the credit collection and sales team. Again, what Alicia was mentioning if you know you want the sales team to feel comfortable talking to you about any kind of extended-term that they may maybe be offering. In addition, validate your, how do you validate the accuracy of your invoice processing? Right now we do have the tool of deductions we do report, and now with Alicia taking over the invoice and portion, we can do a lot better job of identifying why the customers deducting or if it’s an internal error on our end to you know quickly correct that and along with DSO are you using any other kind of metric to identify how your collection department is performing? We use LNA in addition to DSO, the credit effectiveness index, along with that of an AR turnover. So, what lies ahead was what we’re here as well we’re customers as well. We want to build a more dynamic collection strategy. We want to be able to predict payment delays in our customer Payment behaviors. So yeah, we’re here we’re shopping as well, to identify how we can better, you know, align our strategies with the industry as saucy and he mentioned in his keynote, AI becoming big and becoming more important with within the industry. And we want to be a part of that. We want to be a part of identifying those customers who are paying, delayed, or predict that kind of behavior.

[12:33] Alicia Geades:

So I’d like to talk about sustainability here as well though, actually had some department turnover in 2019 and retirement and that kind of thing, promotions and middle of the year last year, we had a big collections mists, and it was a lot of work to dig into that aging and figure out what was going on and why it was such a big Miss. And it was a combination of things. It was new people in the department, not really having a good understanding of the customer base. There’s a lot of invoicing errors. And then we had some customers holding payment that we weren’t aware that they were holding. So, like, like Bernardo just mentioned, I really am here I’m shopping, I’m looking for a good deal on the collections cloud because all use SAP collections today FSCM. And we do have roles and strategies, and all that we still struggle with prioritization. And I think that what I’m looking forward to learning more about is the collection piece and how we can really help us with cash forecasting. So the last June when we had those big collections missed, I could just go to a dashboard and say, oops, who was it, let’s track them down now, instead of it taking three months to recover. So, you know, I think we have definitely come a long way in the past five or six years. It definitely increased focus on the way we interact with the customer more professionally and more often through our correspondence. And then obviously a better understanding of the customer base, but we can go so much further and hopefully really utilize the FTEs that are there in collections to make a bigger impact and better job satisfaction for them as well.

[14:10] James Robinson:

So to elaborate on a couple of points there, whenever we talk about promises to pay, typically those are problem accounts that we’ve gone in and recorded a promise to pay, but may not get to the frequent the payments that are normally on time, we wouldn’t have that reminder to say, Oh, you missed this payment. How about a tool that automatically predicts whenever a customer supposed to pay are going to pay and then send you Hey, this one customer usually pays exactly here, and they’ve missed it by two days. And an alert could be one of your biggest customers, and you may not notice until that ages, several days, but if you could catch it right then and figure out the solution. We’re making Customer Contact. I think that’s very, very valuable.

[15:04] Alicia Geades:

I am going to make a confession right now that our top three or four customers that pay on a regular basis and a monthly aggregate monthly, I put that on my Outlook calendar. You know, it’s kind of a sad deal of the time we’re in, but I put it on my Outlook calendar, did so, and so pay this month? Because, you know, if I missed that big chunk of payment, that’s going to be a big impact on DSO just those few customers. So I’m really excited about the opportunity of where we go next. And I would love to hear from you guys. You know, what are your dso struggles? How do you handle it? Have you had success and what is your collections portfolio look like?

[15:52] Monica:

Don’t be shy.

[15:54] Alicia Geades:

And we could talk later to doesn’t have to be right this moment, but I really do. I’m excited about new opportunities. Anything You guys can add would be great.

[16:09] Audience 1:

So we faced many of the same problems. I think a lot of people in this room faced with customers, especially our largest customers wanting to push payment terms, way out advanced 60, 90 days. So to be able to tackle that while maintaining a healthy DSO, we’ve actually just in the last quarter implemented our receivables financing program, which has been fantastic. We were going through C to FO. For our larger customers, we’ve actually just now negotiate with our bank. We’ve got the rates pretty low. So it’s actually we’ve been able to satisfy the customers will bring that cash in soon. That’s great.

[16:40] Alicia Geades:

So did you have I guess, good adoption, quick adoption?

[16:45] Audience 1:

Because it’s straight through the bank. There’s no negotiating that with the customers. The customers just pay us normally. We report that back to the bank and we bring them on. Yeah, it’s really it’s seamless.

[16:56] Alicia Geades:

Great.

[17:01] Monica:

Are there any more questions or comments?

[17:10] Audience 2:

Hi. My question is related to an item you mentioned about discrepancies in billing. Yes. Can you give us an example of how you proactively address and, you know, did you go for a longer-term solution to those, because that seems to pop up, and when they occur?

[17:26] Alicia Geades:

Right? Right. So a couple of different points there. So as Bernardo was talking about our cash applications tool, that’s really helped us hone in on the duction reason codes and then root cause. So from that perspective, we’ve gotten a lot better about being able to fix issues before they become, you know, long term issues.

[17:47] Alicia Geades:

Talking about the scenario, I told you about this summer with our collections customer collections missed. Interestingly left, it was a large set of invoices for a couple of different customers who require us Input them into their portal. So our invoices were being inputted but rejected. And no one was paying attention to that. So they were out there rejected, and there was no follow through with our customer support or credit team. It was just sort of out there in the black hole. So yes, we’ve definitely become more collaborative. And obviously, now I have responsibility for both departments. So best-case scenario, but it certainly was a wake-up call to really track that. What are we doing with that customer portal set of our customers? And how do we deliver them the invoice they need as fast as possible that they can pay? I mean, as you guys know, I’m sure that you know, if we submit an invoice and it gets rejected, the customer never even sees it, right? They’re not proactively trying to resolve it with us or for us. They just don’t think we’ve built them yet. So you know, it’s a whole other presentation or thought about what customer portals mean in that whole set of work. I have a lot of opinions on that too. But you know today we are we it is what it is we have to submit those we’ve agreed to submit those invoices and manually through their portals. And so it was a learning experience to really pay closer attention to the error rate. And then that’s also something that doesn’t get captured in dispute management all the time, right? It’s fully an unpaid invoice because of pricing, or free being may be wrong, and it can’t be submitted against their PO or can’t be processed against their PO.

So it’s not the short pay is just it’s just stuck out there. Oh, yeah.

[19:41] Audience 3:

So you mentioned you were using SAP FSCM. Yeah. To speak to management similar to what we’re doing here at Johnson and Johnson. And you mentioned it reporting, analysis. Do you use an external reporting tool, or do you utilize what’s a very custom reporting?

[19:54] Alicia Geades:

No, we just use the standard reporting, so we have always used that kind of reporting. But where we really saw increased benefit was when we did the cash applications project. And we’re able to really hone in our reason codes and root cause. So it took a couple of kinds of iterations to figure out exactly what was right for us. But getting that down to that level of detail in the dispute management platform is really that helpful.

[20:24] Audience 4:

We just implemented last Thursday, the collections module. So we can exchange info if you want some feedback on that. But we were living in manual spreadsheets and living in the greater than 90 days, right. So we tried to put a lot of thought into how do we handle those portal and what we call semi portal customers. Because we were having a lot of the same challenges where the EDI team is getting notifications. They weren’t letting us know things didn’t get through. And so it was a lot of follow up. What we did to get around that with HighRadius is we’ve used their tag system to identify if it’s uploaded to the portal, if it’s pending a claim if it’s pending payments so that we can then create metrics from that to say, okay, at any given time, what do we have open for pending claim or for not uploaded and things of that nature. So maybe a direction that you can take.

[21:16] Alicia Geades:

Thank you so much.

[21:17] James Robinson:

It sounds like some good information.

[21:19] Alicia Geades:

Absolutely.

[21:21] Monica:

Any more questions?

[21:25] James Robinson:

Yes, sir.

[21:27] Audience 5:

Does that mean that tag process that you’re using is facilitated through the tool.

[21:34] Audience 4:

So like the triggers that we have times a week, and our collector is supposed to go in and you can see the list of tags associated, so you need to look at everything once again and before official reward your name right over there. And so you can easily identify what’s the chapel and what you told me talking to you. He just started on it. Saying hi to him.

[22:04] Alicia Geades:

So that’s golden. That’s really great information. Yeah. And we were living in, you know, Excel world. And we still are to some extent. But you know, if I looked back five years ago, we were living in Excel and outlook. And, you know, I just told myself with Outlook reminder, don’t tell anybody else. But, you know, that’s how we were doing collections. And then, you know, this manual correspondence to the customers, sometimes I’m professional, you know, sometimes incorrect. And one of the better things, one of the best things that we did was implement just a bolt-on the advanced correspondence accelerator. It wasn’t even from HighRadius. It’s not the full collections piece, but it was so helpful in getting us to be able to bust through those accounts faster. And when we were the same, we weren’t contacting you until you know, 60 to 90 days past you, and now we’re starting at 10. So just the fact that the collectors are able to go in with You know, two clicks and send that correspondence and get an answer back to their own inbox. Invoices attached immediately all of that has done wonders to really help us bring down DSO in cases where the customer would have paid all along if only we had contacted them, you know, 50 days sooner.

[23:24] Audience 6:

Can you tell me if you have a method for assigning collectors to different customers?

[23:30] Alicia Geades:

Yes. I don’t know if it’s really foolproof, but that to me kind of goes back to a relationship. So you know, just looking at my staff. And we are also geographically kind of divided. We have different regions. So East does business a lot different than I say the Wild Wild West. So like our California, you know, gold mining customers, they’re just like we out there and where our east steel customers are very systematic, right? So looking at my staff and saying, you know, who has the personality that most fits, and then also who can be more aggressive, professionally aggressive. So if we have a region that has, you know, a lot, a lot of customers that maybe take advantage of being able to pay beyond terms for instance, who it’s been a really build on that and identify it early and not be afraid to push a little bit harder. So I don’t have a drill, I guess system driven way other I mean, as far as that goes.

[24:32] James Robinson:

A lot of thought. We do have some segmentation as well. So in certain parts of the country, we have a lot of construction projects. So we have a specialist that deals just with liens and bonds. And he is assigned as a collector for those accounts because they’re they take a little bit extra care. So some segmentation some matching is a personality but not really systematic.

[25:00] Alicia Geades:

Right. I would also mention that a change in I guess, portfolio at age, right. So our group will escalate that within our own department. So then when an account and each region account is kind of different, but depending on the risk category or risk classification will escalate that maybe to an analyst to begin pursuing, or even to me to say, hey, do we need to look at as their risk level change? We missed it. Is there something we need to do? Can someone else contact them and kind of be the heavy now? Because I’ve had that relationship ongoing and everything’s been smiles and rainbows, but now we have to get a little tougher. So there’s that as well. Yes, sir.

[25:48] Audience 7:

More just on how you go about that escalation process?

[25:52] Alicia Geades:

Yeah. So it’s actually written into our credit policy for one, and as I said, we don’t have a systematic way. It’s not inside the system. So we’re talking about outside, desktop manual, constant, reinforcing. And that kind of thing. So you’re reviewing the age balances and hey, so and so, you know, you’ve been working on this and doing kind of the same thing over and over, it’s time to escalate it. I’m hoping maybe there’s some magical thing and collections module that can help us with that. Okay.

[26:30] Audience 8:

The exciting pieces to come, right are, you know, what’s the root cause the use of the tags, right? My associate performance, right, seeing who’s doing what, what’s the aging? Right. So the analytics, the analytics piece of it is the exciting part that I’m looking forward to.

[26:48] James Robinson:

We’re excited about that too.

[26:49] Alicia Geades:

Yeah. Sustainability, if you get back to my story about some turnover, good turnover, promotions, and retirement and that kind of thing. We had a blip. We had, you know, this big unknown because so and so left the company and they knew that this customer had this issue regularly. But it sounds like with that, that offering of the collections in the cloud that you can erase some of that, that gets lost.

[27:14] Audience 8:

A follow up to your credit policy mentioned for the escalation process, is your credit policy published to your customers or is that internal only?

[27:19] Alicia Geades:

Internal.

[27:23] Audience 8:

Okay.

[27:23] Alicia Geades:

And it’s, we try to stay gray with it right and not box ourselves in. So it’s not, you won’t find a lot of things in there that are extremely black and white, something like this escalation is very black and white. But, you know, we tried to, I tried to write it so that it was open to be able to allow, you know, growth for the business at the same time, minimizing risk as much as possible. But, I mean, I think we all know that we get that phone call, sometimes it says, hey, we got to do this, you know, and I don’t want to box us in a black and white scenario for terms are risk level.

[27:55] James Robinson:

And the policy ought to be something you can hold yourself to and hold yourself accountable to. So I think whenever we started reviewing our policy, we found it’s not attainable, though it, just shred it. So we went back and yeah. So we put a lot of work into putting something together that we could really, really say yes, we do this. So there is a lot of great.

[28:25] James Robinson:

Any more questions, we just have a couple of minutes.

[28:30] James Robinson:

Back to our first question, or first gentleman’s question or comment about finding different financing. I’m sure you all get hit up with supply chain financing offers with extended terms from customers. I’m not a fan of those, but we have found instances that they are good risk mitigation assets, so we have seen an increase, a decrease in DSO by allowing them and getting dressed at the same time. So even though they’re, they’re not necessarily ideal financing situations, but sometimes they’re useful.

[29:14] Alicia Geades:

It’s been a fun conversation.

[29:18] Monica:

Thank you very much everyone else great session and thank you all.