The KPI Connection - Days Sales Outstanding

September 25, 2014 | Becca Sundal

On Tuesday we posted the metric of the month (Days Sales Outstanding this month). Today we’re going to take it one step further and talk about how Days Sales Outstanding translates into – or “connects” -- to key performance indicators (KPIs)….in other words, things you can actually talk to your client about impacting through your solutions. Said differently – This is the HOW to make the numbers make your job easier.

How do you incorporate it into a meaningful discussion with your client? If your client has expressed a need, or you have identified an opportunity, to reduce (improve) their days sales outstanding, HOW and by HOW MUCH can your solution help them? Let’s take a look at an example of a tool we use here at FinListics. We call them Business Process Maps and they do just what you think they might do – they map a financial metric to the business processes that impact it, the activities that comprise each process, and ultimately to the KPIs that can be impacted by changes or improvements in that business process.

Here we’re looking at a sample of a business process map for days sales outstanding in the consumer products industry, and are focusing on the breakdown of Finance & Accounting for our example (click on the graphic to enlarge it): The KPI Connection - Days Sales Outstanding

The map connects days sales outstanding to the business process of Finance & Accounting and shows percentage of overdue receivables as one KPI that can be impacted by changes in the underlying finance & accounting activities within a consumer products company. So when you’re talking to a consumer products client who’s focused on improving their days sales outstanding, one example of talking the HOW, would be to show how your solutions can reduce the percentage of overdue receivables….and HOW that will ultimately reduce days sales outstanding.

Operational KPIs In Action

Here’s how that conversation could go -- for a consumer products company with $1 billion in annual revenue, industry averages show that the percentage of overdue receivables typically is about 56%. Your experience with other clients in the industry tells you that your solution can reduce overdue receivables by 3% - 5% on an annual basis - which means you can reduce your client’s accounts receivable by $2.5 to $4.2 million in the first yearjust in that one area with your solution! That would reduce days sales outstanding by 1 to 2 days - that’s the kind of value that gets client executives to sit up and take notice. Not only that, but you can also point out that delaying the decision to implement, or dragging the decision out through a long RFP process, will cost them too – in this example, between $208,000 and $350,000 per month! Compelling stuff….. The key to getting the above information? Asking questions:

  • For your clients’ industries, what metrics, business processes and operational KPIs can your solutions significantly impact?
  • What are industry norms for these operational KPIs?
  • What ranges of improvement do your solutions provide for these KPIs and what is the cash flow value to your clients?

And of course – the most important question: How can you impact these areas and ultimately drive results for your client’s business? For a deeper discussion on Operational KPIs and how they drive sales, see our previous blog post at http://www.finlistics.com/blog/introducing-a-new-series/

Posted in KPI, Metric Matrix, Metric of the Month, Key Performance Indicator

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