Page 124 - Finance for Non-Financial Managers

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Critical Performance Factors
A 43-day DSO isn’t so hot if everything is late and getting
later! When a DSO of 43 Is Bad 105
Here are two examples of companies with accounts receivable, pre-
sented based on the length of time the accounts have been outstanding:
Company A Company B
Average revenue per day 21,667 21,667
Current, not yet past due 600,000 600,000

0-30 days past due 250,000 40,000
31-60 days past due 70,000 0
61+ days past due 20,000 300,000
Total outstanding 940,000 940,000
DSO 43 days 43 days

Company A show a status of accounts receivable that’s typical, as
some customers pay on time, others take a while longer, and a few
stretch out pretty far.The situation is pretty normal.There’s no prob-
lem with a DSO of 43 days. Company B typically collects much more
promptly than Company A, but nearly a third of its accounts are way
out at 61+, clearly indicating they don’t intend to pay normally.The
DSO is still 43 days, but there’s a big problem!
Always look at both the DSO and the age distribution of the
accounts, the detailed report showing how long customer balances
have been outstanding, before concluding that everything is OK.That
detailed report is called the aged trial balance of accounts receivable.

lation is subject to less misleading fluctuation if you use a
broader period of time for this metric.

Measures of Profitability
These metrics attempt to evaluate the company’s earnings by
calculating various relationships between elements of the income
statement and other numbers. The idea here is to measure the
company’s earnings performance, that is, how well it’s keeping
its resources working to produce profitable transactions.