When Lhoist North America hired Chris Soignier as Credit Manager in 2012, senior management recognized that they wanted to better control risk and reduce DSO. They had just made DSO one of the variables that impacted bonuses for sales people, but there was still much to do in order to achieve their objectives.
Chris identified a number of issues that needed attention, including:
- Changing how DSO was calculated;
- Improving DSO reporting for the sales department;
- Building relationships with Sales and customers;
- Better monitoring and enforcement of credit limits;
- Modifying hiring practices.
Changing How DSO Was Calculated
Lhoist is headquartered in Belgium and requested that all international subsidiaries calculate DSO using annual credit sales. This approach provided senior management with an acceptable measure for receivables’ impact on working capital requirements and overall trends. This equation was used to calculate DSO at the end of each month:
Accounts Receivable Balance / (Sales for last 12 months / 365)
But seasonality and revenue growth made DSO based on annual revenue a poor measure for monitoring seasonal collection performance. Chris noticed that “even if all receivables were within terms, DSO would rise during seasons with higher revenue and would decline during periods of lower revenue when comparing the accounts receivable balance to annual average sales.” The sales force needed a DSO measure the reflected how well their customers were paying on the recent level of invoices so they could quickly identify where debt collections needed attention.
Given the shortcomings of using annual average sales, Chris successfully lobbied to use quarterly average sales as the appropriate variable for both the credit and sales departments to measure immediate performance and trends, using this equation:
Month End Accounts Receivable Balance/(Sales for last 3 months / 91)
He also convinced Belgium headquarters that this was a better approach for evaluating how well the credit department was managing receivables and collections and this eventually replaced the DSO metric based on annual sales.
Improved DSO Reporting
The sales staff was now keenly interested in knowing what their DSO was so they could optimize their compensation. The legacy report, however, was cumbersome and not user friendly. Management had recognized that a universal target for the department was not appropriate, but these new targets meant that reporting would need to be revamped to facilitate each sales person’s ability to monitor the performance of his/her accounts.
Chris designed a dashboard that could be used by both management and individual sales professionals. It included the current DSO calculation and a graph with historical monthly DSO measures so trends could easily be seen. At the aggregate level, rising DSO could be acceptable if the mix of business had shifted to markets/industries where longer terms were granted. Chris said “The best measure of performance was not DSO, but DSO compared to target DSO.”
Knowing that most sales people are inherently competitive, the report was designed so each person’s performance was readily visible on the same chart. Sales people now had a secondary motive to manage their DSO in addition to bonus potential. “No one wanted to see him/herself at the bottom of the list when compared to his/her peers.”
It took a recent college graduate about a month to design an Excel-based report that imported the relevant data from SAP and provided all the functionality described above. From the high level dashboard on overall company performance, the user could then drill down along regional or individual performance all the way to the account level.
Developing Relationships With Sales and Customers
“Earlier in my career, I had worked in a credit department that had been nick-named as the sales prevention group. My focus at Lhoist was to facilitate sales while managing risk. A major goal was to build relationships with Sales and show I was there to support them while adhering to company policy.” He immediately started meeting frequently with sales executives and local sales people to build rapport and mutual understanding.
“I also attended regional sales conferences so I could personally meet the sales teams. When issues arose with large customers, I was willing to travel to meet the customers with their sales person in the interest of developing solutions. When feasible, I like to extend these trips to visit other area customers to build and reinforce relationships both internally and externally. Establishing personal relationships in this manner proves quite helpful when other issues subsequently arise. “
Better Monitoring and Enforcement of Credit Limits
One deficiency in the credit department that was immediately recognized was that credit limits were not being adequately enforced. “I began daily review of a report that highlighted customers that had exceeded their credit limit or had orders in the system that would put them above the limit if outstanding invoices were not paid. The appropriate credit analyst and sales person were immediately informed of each material situation to rectify.”
Initially there was some resistance from Sales to this new procedure. However, Chris’s efforts at building relationships with Sales really paid off in this area. He didn’t just say “No”, but explained the issue and volunteered to explore a variety of solutions so positive relationships could be maintained while making the sale within acceptable risk guidelines.
Modifying Hiring Practices
When Chris joined Lhoist, not all of the staff within the credit department was performing at the level desired. Training and mentoring helped some people improve. But, when recruiting for new staff, “I found a company practice that was restricting the caliber of applicants to choose from.”
Historically, the company hired new personnel as contractors with the opportunity to become a full time employees once they had proven themselves. It turned out that many well qualified candidates, especially those who were employed, would not apply for contract opportunities. “Once I could demonstrate that I was not able to attract the people I desired because of the ‘try before you buy’ approach, I was able to gain approval to hire direct to perm.” The result was that the overall quality of staff within the department improved and current employees responded positively to being surrounded by stronger co-workers. Personnel turnover, which had been a seriously disruptive problem, significantly improved as well with this new approach.
In the course of one year, there were a number of dramatic improvements. The credit department was functioning much better. Credit exposures were better controlled and collection performance improved. A strong, cooperative relationship was built with the sales department. DSO incentives created motivation for teamwork, and reporting support from the credit department enabled sales professionals to have the information needed to succeed. DSO improved 7 days year over year in the first 6 months of 2013, which represented a 14% improvement as it declined from 50 to 43 days. Equally important, very few sales were lost due to the tighter enforcement of credit limits, and bad debt declined as a result. The goals established by senior management had been achieved.
I want to thank Chris for sharing his story with me and the community. It shows the real value professional credit management can bring to an organization and includes some great advice. If you have a story and/or advice to share, please reach out to me. I’m always looking for real examples for my articles.