5 calculations no Credit Manager should do by hand

An ambitious credit manager wants to achieve maximum results – results that are made visible through a number of measurements and metrics. Daily measurements from your credit management environment, showing the financial health of your receivables portfolio and how your team is performing against their targets, are essential in order to stay on track with your ambitious plans. At OnGuard we know how important measurements and the resulting insights are to our customers. We have built calculations and metrics into our software which every credit manager should know and have available within the click of a button. This means no more collecting information from various systems topped up by hours of Excel building, but clear, consistent, relevant and reliable data available to you on-demand. Here are five calculations you really shouldn’t be doing yourself:

1. DSO

DSO stands for Days Sales Outstanding. It’s a measure of the average number of days your team takes to collect revenue after an invoice has been sent. A relatively high DSO typically indicates that an organisation has a customer portfolio with credit challenges or a collections team that is underperforming. A low DSO can come from a high performing team, but also be a signal that credit policies are too tight which could impact an organisation’s competitive position in the longer run. There are several ways of calculating DSO, but in general it tells you:

• How quickly your customers are paying
• How well your credit and collections team is performing
• How long it takes on average to collect open invoices
• An indication of your customer satisfaction - happy customers have fewer reasons not to pay!
• The credit position of your customers
• How well you are doing compared to your internal or industry peers - a benchmark.

2. Ageing

Invoice ageing is a calculation which shows how long the invoice ages (like wine ages, but it doesn’t get better the older it gets) before the customer pays an invoice. The ageing should be as low as possible of course. Mostly the oldest invoices are the ones which create the biggest worries for a credit manager if you think about the company as a bank to these customers, especially the large ones. How much interest have you already missed on these unpaid invoices? Getting this data in front of you can help you prioritise and focus your efforts where they are needed most.

3. Historical payment period

The historical payment period shows an average over the whole of last year. So the more invoices the customer has paid, the more accurate this number becomes since it’s a weighted average. This calculation records the past which will help you in looking ahead towards the future. For example: OnGuard can calculate future cash flow based on the historical payment period.

4. Customer Score

One metric which is less obvious but still important, is customer scoring. Based on data which comes from payment behaviour recorded in OnGuard as well as data from external systems like your financial administration or even third party data sources, OnGuard software can calculate a customer scoring model. If any changes occur in metrics which influence this score, our software can trigger specific actions to adjust your collections approach, accordingly. An example is a sudden change in a customer’s payment behaviour which could be an early warning signal of bigger problems. Taking proactive action can help prevent bigger issues in the future.

5. Interest and Cost

Chances are interest and costs are a topic of discussion in your organisation. Both for internal reference (what is this open invoice actually costing me?) and external reference (dear customer, please be informed that this is what this open invoice is costing me) it’s a great calculation. It’s an extra way of engaging your customer to put your invoice on the top of their accounts payable stack.