Collins | Align Your Goals For Ad Sales And Credit

Have you checked the departmental and personal performance goals for your credit and collections department lately? How do they line up with those for the sales team? It’s very possible they aren’t in alignment; they may even be in conflict. Misalignment can adversely affect a company’s profit and loss statement.

Day Sales Outstanding

John Sloan, a longtime media credit expert and former executive director of credit for Turner, observes that many organizations base the performance of their credit managers on achieving or maintaining industry benchmarks for DSO — days sales outstanding. MFM’s Understanding Broadcast and Cable Finance, a Primer for Nonfinancial Managers describes DSO “as a measure of how long on average it takes a company to collect the money it is owed.” DSO is also addressed in the BCCA Credit & Collections Handbook.

In the case of ad sales revenue, calculating DSO typically involves dividing a station or company’s total accounts receivable by the average net sales per day. The resulting figure indicates the average number of days of sales remaining unpaid from advertisers. The longer it takes a company to collect on its accounts receivable (a high DSO ratio), the less cash it has on hand for paying its operating and debt expenses. Less cash on hand means more borrowing.

‘Changing The Goal Posts’

DSO is clearly a valuable metric for finance executives, valuation analysts, and others looking to assess a company’s financial health. MFM and BCCA members who participate in the associations’ quarterly DSO benchmarking survey also use this data to assess how their organization’s DSO ratio compares with industry norms.

John Sloan suggests that companies that measure their credit department’s performance solely on DSO may need to “change the goalposts” to ensure the objectives set for credit align with goals set for their ad sales team. His recommendations also address some of the underlying factors that can result in a lower DSO ratio in the process.

As Sloan explained in an article he wrote for MFM’s member magazine, The Financial Manager (TFM), “Credit can have the most impact in three areas related to the order-to-cash process: credit approval, billing and collections.”

Faster Credit Reviews

“Credit review is an important precursor to booking a sale from a new customer. And the criteria and time standard for the credit turnaround process is something that can be measured,” notes Sloan. “So one option is to develop an agreed-upon time for credit to approve or disapprove an order.”

In describing how to go about creating a metric for this purpose, Sloan suggests creating a monthly receivable report detailing the number of new orders reviewed. The numbers that meet or do not meet the time standard can be shared with sales and operational management.

Given the limited time and resources available to a credit department, Sloan also recommends credit departments place more emphasis on the time required for approving bigger media buys. As he points out in his article, “simple credit-scoring matrices can improve the timing and efficiency of credit approvals.”

Industry-Specific Credit Tools

This understanding was one of the reasons BCCA’s industry-specific Media Whys credit report includes a credit scoring feature based upon industry-specific information gathered from BCCA members. This is also why BCCA added a customizable credit decisioning tool for its report users.

Both the credit score and the credit decisioning tools rely on Media Whys’ proprietary media-specific aging database as well as data about collection filings, tax liens, judgments, corporate linkage, payment trends, and trade data from D&B or Experian.

BCCA offers a number of different credit reports to meet specific company needs. Report samples are available on the association’s website.

Invoice Timing And Accuracy

Credit and collections functions are typically combined at media organizations, so performance goalposts should also address the accounts payable side of the coin, beginning with invoicing. Receiving payments in a timely manner depends upon getting invoices out promptly. For performance measurement, Sloan recommends “formulating a mutually agreed upon standard for when billing needs to be completed and out to customers.” It should be easy to include this information in an overall receivables report for management.

Invoices must also be accurate. Eliminating or reducing billing discrepancies is fundamental to securing payment. As collections managers can attest, agencies or media buyers will never approve an invoice for payment if they find any discrepancy between the amount billed and what they believe was promised in the sale agreement. From a goal-setting perspective, Sloan suggests using a log that shows the number and amount of outstanding discrepancies.

Collections-Based Objectives

When tracking and rewarding collections efforts, Sloan says accounts receivable (AR) aging reports can be very effective. “Review the AR aging for at least 12 months and calculate the percentage of collections for each aging category,” he advises. Then, use the average to calculate “an achievable goal for a new month.”

Of course, as with any rule of thumb, “there are a few caveats.” Since the percentages are based on a reduction in accounts receivable, any sales adjustments or credit memos would reduce AR. Consequently, Sloan says, “one needs to also calculate the average percentage of credits issued over a 12-month period.” In addition, “cash collections would be reduced by the average credit memo percentage.”

He also reminded readers that the AR balance should not include amounts outstanding for accounts where bankruptcy or similar situations mean the station cannot expect collection of the full amount. These amounts would be removed from the calculations and will likely be written off as bad debt.

BCCA’s Upcoming Media Credit Seminar

Sloan’s article appears in the July-August edition of TFM. A copy of the publication will be available for non-member viewing on the MFM website for another week or so. Thereafter, it will be available in the “members only” section.

In addition to the performance goals he outlines, MFM and BCCA recommend adding an incentive that encourages your credit and collections professionals, especially those who may be new to the industry, to take advantage of professional education opportunities.

Examples include the upcoming 2018 Media Credit Seminar, which will be held in Manhattan on Oct. 25. Organized by BCCA and NMCP (National Media Credit Professionals), the full-day seminar will focus on high-level credit-related issues that are relevant for media industry credit professionals.

A copy of the seminar’s agenda and related information may be found at https://www.mediafinance.org/media-credit-seminar-ny. BCCA will be sharing additional details as the event draws closer.

Now Is A Good Time For Goalpost Repositioning

John Sloan’s advice concerning the evaluation of performance goals comes at a great time for TV stations and others who will be setting their 2019 department objectives in the coming months. If you are interested in using data from MFM’s quarterly DSO report in those goals, contact me at the email address below.

While Sloan limited his discussion to the credit and collections department, it also makes sense to review how the goals set for your ad sales team can be aligned with the goal of achieving a lower DSO ratio and improving cash flow.

Sloan began his article with an observation by Gordon Bethune, former CEO of Continental Airlines. Bethune said: “What you measure and reward is what you’re going to get.” Ensuring departmental goals align with the organization’s mission is crucial for success.

Mary M. Collins is president and CEO of the Media Financial Management Association and its BCCA subsidiary, the media industry’s credit association. She can be reached at [email protected] and via the association’s LinkedIn, Twitter or Facebook sites.