Lowering a company’s days sales outstanding can be, well, outstanding. Collections expert C. Robin Szabo describes a careful way of doing it that can really pay off. It involves training new customers, retraining old ones, getting low-spend customers to use credit cards and, if needed, going to court.
There’s nothing like a practical example to bring home the value of a concept. In this case, it’s DSO — days sales outstanding, a key metric used by financial managers and analysts.
DSO is defined in MFM’s Understanding Broadcast and Cable and Finance, Second Edition: A Primer for Nonfinancial Managers as “a calculation that divides the total accounts receivable by the average net sales per day.The resulting number represents the average days of sales remaining unpaid from advertisers (or subscribers).”
C. Robin Szabo, president of Szabo Associates, Inc., media collection professionals, gives DSO that real-world “aha” with the following example: “Companies with $50 million in credit sales annually can increase their cash inflow by $138,000 for each day that their days sales outstanding is reduced.”
Once we understand DSO, we can appreciate the benefits it can provide the organization. These include reducing the need to borrow cash, which in turn lowers a company’s financing costs and thereby helps to lift net income.
However, as Szabo points out, “companies need to strike a delicate balance between sales and financial objectives.”
In the “Where Credit is Due” guest column appearing in the July-August issue of MFM’s The Financial Manager (TFM) magazine, Szabo discusses three areas of a media company’s accounts receivable portfolio that can be targeted to lower DSO without inhibiting revenue growth.
Ensuring an Optimal DSO Ratio with New Customers
The first area addresses newly-approved credit customers; they require special attention in order to ensure your payment expectations are met. Szabo says the process begins with payment training for new customers, a joint effort of credit and sales personnel.
“Sales personnel lay the groundwork by reinforcing your payment terms at the time of sale, followed by a welcome communication from the credit department thanking the new customer for their business, informing them of their credit approval and limit, reminding them of your payment terms and providing them a contact to discuss their bill if needed,” advises Szabo.
He recommends the training continue through a follow-up call from either a sales or credit department representative about 15 days after invoicing. In addition to thanking the customer again for the business, the call serves as an opportunity to solicit feedback about your service.The call also allows the media provider to confirm the invoice was received and to see if the client has any questions about it.
Keep the communication flowing by contacting the new customer again if payment is not received in compliance with the credit agreement terms.“This soft repetitious approach will yield solid results,” promises Szabo.“On average, companies churn 20-30% of their customers on an annual basis, so over time the new customers you train to pay promptly will become the majority of your customers, helping to lower your DSO.”
Retraining Existing Customers to Pay Promptly
The second area involves existing customers. They may require payment retraining, and this can be difficult. As Szabo explains, “These clients have grown accustomed to paying on their terms versus yours, and their reasons for paying beyond your terms will vary.”
He goes on to say that “the reasons (for late payments) with direct accounts could be company payable policy issues, cash flow issues, a misunderstanding of your terms or simply that it has been acceptable to pay late.”
These same factors can affect delinquent payments by advertising agencies. Ad agencies/buying services may also go beyond terms because of non-payment by their clients.
Szabo believes the retraining process should begin by prioritizing these customers in order of the largest dollars, the highest risk and the habitual slow pays. “Your goal is to spend your most energy on the customers that can have the greatest impact on reducing your DSO,” he explains.
In addition, “It is important to begin your collection contact early with both direct accounts and agency accounts, at no later than 10-15 days beyond your terms,” Szabo advises. “Otherwise you are not allowing yourself enough time to make an impact.”
As Szabo points out, a business will not have a DSO less than 60 days if it waits until 60 days before its collections department begins contact.
Instead, the communication should begin 10-15 days after the due date with an inquiry about the status of the invoice. This allows the media provider to uncover any disputes and to get a commitment from the customer for an acceptable payment date.
Szabo also recommends that the dialogue conclude with an open discussion of how the payment cycle can be reduced with future invoices. He says, “Strive for a continual reduction in payment days, which over time will lower your DSO.”
Focus on Your Lower-Spend, Open Credit Customers
The third set of customers that Szabo says can affect DSO involves the lower-spend, open-credit customers. Focusing on this set of clients is especially beneficial for businesses that are highly transactional. He explains, “These customers are costly to credit investigate and to spend personnel hours on collecting.”
As an alternative to receiving payment by check or credit card, Szabo recommends companies try to move these customers to paying by ACH [automated clearing house] debits. This method “alleviates the uncertainty of check receipt and is a fraction of the cost of a credit card transaction.” ACH payments require written authorization from the customer to debit their bank account on the invoice due date, and then processing the transaction at the prescribed time. As Szabo observes, adopting this method of payment means, “your customer is still on open credit, but you are now in control of the payment process.”
While the target number of optimal days can vary from one media sector to another, Szabo says he has found that a DSO of 45 days is a “pretty good goal” for companies with 30-day terms. “Those who focus their sight line on such objectives can reap increasingly positive rewards.”
When You Need to Involve the Courts
Unfortunately, there can be a set of customers who are beyond retraining and require media providers to take a different tack in order to secure payment for the services provided. These instances may require taking the advertiser or its agency to court, a course that has its own set of obstacles to navigate.
To help media companies optimize their collections results when this course of action is required, MFM’s BCCA subsidiary is hosting a Distance Learning Seminar that will address “Litigating Commercial Collections & Defenses Raised by Debtors.”
Scheduled for Tuesday, Sept. 18, from 3:30 – 4:45 p.m., the webinar will be moderated by Dan Spilatro, managing partner of the Spilatro Law Group, a collections attorney with an exceptional track record of success in helping companies get paid when traditional collections efforts have failed. More information about the webinar may be found here.
Anticipating the 2013 Ad Market
This is budget season for most media companies. Accurate DSO projections are only one factor contributing to whether 2013 results will be better (or worse) than budget. Other things to keep in mind when preparing forecasts include overall economic forecasts and advertising trends.
To help with the budget/forecasting process, MFM is hosting Media Outlook 2013, next Thursday, Sept. 13, from noon to 5 p.m. at Hearst Tower in New York.
An annual MFM event, this year’s seminar is co-chaired by John Drain, SVP, finance, Hearst Television, and Glenn Krieg, CFO of Morgan Murphy Media. They have put together a program that will help media companies apply the latest insights from industry experts to help media companies prepare their financial forecasts for the coming year.
Planned sessions include a presentation on “Trends in Emerging Media,” by Brian Wieser, CFA, senior analyst, Pivotal Research Group; a keynote address focusing on regulatory and tax issues by Andrew Lyon, principal in PwC U.S.’s National Economics and Statistics Group; and a CFO outlook panel. More information and the agenda may be found here.
Budget forecasting like DSO is, as Robin Szabo reminds us, “always a work in progress.” That is why MFM and BCCA are always focused on providing the most up-to-date information for members and the media industry in general.
In addition to in-person events such as Media Outlook 2013, the MFM CFO Summit, BCCA’s Media Credit Seminars, and our annual conference, Media Finance Focus, the associations offer webinars, tele-seminars, TFM and other articles, a weekly electronic news summary along with a number of other products and services intended to identify and share leading practices.
If you are looking for media financial information, or if there is something you would like to see us add, please let me know by commenting below or by participating in one of our online discussion forums. I am always on the lookout for ideas for future Front Office columns and ways to help the media industry’s financial professionals.
Mary M. Collins is president and CEO of the Media Financial Management Association and its BCCA subsidiary. Her column appears in TVNewsCheck every other week. You can read her earlier columns here.