FOCUS: AR and DSO reduction.
The Asia-Pacific branch of this company had been experiencing high overdue Account Receivables (AR) and high Day Sales Outstanding (DSO). Both of these measures impact profitability because they refer to the number of days since the company billed a customer, but had not yet received payment. When management investigated, they found that there was no process in this branch to control the AR and DSO problems.
An improvement team was quickly assembled to analyze the problem and implement required improvement actions. The team applied appropriate process analysis, statistical six sigma tools and measurement processes. Several opportunities to resolve the issues and enhance services were implemented. This resulted in the following improvements:
- Team designed a set of AR Prevention Processes to minimize accounts becoming overdue
- Team designed a set of AR Elimination Processes to ensure that the level of overdue Account Receivables is within controllable levels
- Customers were informed of the “Stop Shipment Policy” when overdue AR exceeded either a fixed credit limit or the credit period
- Initiated a credit policy that communicates guidelines on what the expected performance levels are for the branch and its staff so as not to put the branch and company at financial risk
Days Sales Outstanding was reduced from 161 to 80 days in less than one year. As a result, the company has more cash flow available and pays less finance charges to their lenders. According to the Asia-Pacific branch president, this project has even earned respect from their customers for the control processes on Account Receivables.
* Due to nondisclosure agreements, the organization referenced in this example cannot be disclosed.