Cash Flow Improvement: 24 days improvement in Days Sales Outstanding over three months Written by Kaizen Enterprises Pty Ltd
PDF Print E-mail
Case Studies

 

Client: Stationery and Labelling supplier (US Listed)

Project: To reduce Days Sales Outstanding (DSO) from around 65 days to 42 days

Service: Cash Flow Improvement

Key achievements:

  • Reduced DSO from around 65 days to 41 days within three months
  • Successful identification and resolution of impediments causing payment delays
  • No loss of customers

Synopsis:

Kaizen Enterprises was engaged by the Australian arm of a US multinational with global turnover of US$7 billion p.a. in the stationery and labelling industry. Our client’s Days Sales Outstanding (DSO) at the outset of the project was around 65 days, and senior management believed that a reduction to sub-50 DSO was not possible.

We subsequently agreed to an optimal target DSO of 42 days.

The DSO was reduced from around 65 days to 41 days, within the agreed three months, without the loss of a single customer.

Our strategy centred on reordering the Accounts Receivable ledger from alphabetical to highest dollar value in descending order, then identifying the impediments that were resulting in payment delays.

Although the client’s ledger was not large – around 1,000 customers – many of the customers were national businesses, including David Jones, Myer, K Mart, and various Australia-wide stationery chains that made significant monthly purchases.

It soon became clear that small credit claims caused major problems with the integrity of our client’s invoices and that several major customers used archaic systems to establish when delivery had been received so that accounts could be approved for payment – often taking several weeks.

We set out to streamline procedures so that payments would be processed by customers more efficiently. For example, we negotiated an agreement with a major customer which operated 57 receiving stores across Australia. The agreement changed the way that the customer handled incoming stock. When our client dispatched goods to any of the customer’s stores, they would notify the customer’s head office by fax. The head office would contact the relevant store and request a signed Proof of Delivery, eliminating the need to wait for the store to catch up on its paperwork. With this customer, we were able to reduce the average time for payments to our client from around 60-90 days to sub-40 days.

Applying Kaizen methodology throughout the Accounts Receivables department, we identified many additional issues and made further changes to improve the operations of the department.

The overall reduction in DSO was a structural change brought about by direct contact with every single customer (debtor) resulting in agreement from customers to pay our client within its terms. Every negotiation regarding terms was handled sensitively, and our client did not lose any customers as a result of our work.