Measuring Credit Department Performance

Why Measure?

• Effective Management: You cannot manage what you cannot measure. Quantifiable metrics enable informed decision-making.
• Delegation: Measurement allows effective delegation to staff.
• Negotiation Strength: Measurement strengthens your position in negotiations.

How to Implement a Measurement System

1. Leverage Typical Credit Measurements:
   • Consider metrics such as:
     • Debtors Days (DSO): Days Sales Outstanding.
     • Past Dues (Arrears).
     • Percentage of Past Dues (Arrears/Total Outstandings).
     • Amounts Exceeding Credit Limits.
     • Percentage Over Limits (Number or Value of Accounts Exceeding Limit/Total Number or Value of Accounts).
     • Credit Notes Relative to Invoicing (By Type of Error, By Customer).
2. Engage Your Team:
   • Involve credit and sales staff.
   • Explore implementing a Performance Management System, such as KRAPI’s.
3. Benchmark Measures:
   • Explore other relevant benchmarks.
4. Understand Limitations:
   • Some measures may be statistically incorrect.
   • Be aware of potential distortions (e.g., sales doubling affecting DSO).
   • Certain underlying patterns may not be captured.
   • Guard against manipulation by experienced staff:
     • Use Multiple Indicators.
     • Warn Against Manipulation (make this a disciplinary matter).
     • Ultimately, focus on improving cash flow.
5. Best Measurement:
   • Cost of Extended Credit (also known as the Opportunity Cost of Arrears).

Remember, a well-conceived measurement system empowers effective management and informed decision-making.

Contact us if you need further information, or if you would like us to help you implement a Measurement System.