Apples to Apples: Metrics don’t differ from country to country or from domestic to international credit. They do differ from organization to organization though

border crowds that the other side measures, or should measure, itself differently than its counterpart. When it comes to how a company or a credit department measures itself, however, many have bristled at the suggestion that this process of calculating and reporting certain metrics could conceivably be the same regardless of the type of business activity taking place: domestic sales or international sales. It seems that it's often the assumption of a great deal of both the exclusively domestic and exclusively crossIn

the US, the subject of how a credit department measures and reports its performance to its upper management begins and ends with days sales outstanding (DSO). Internationally, it often seems a greater mystery how, with the added variable of an occasionally less stable or culturally alien business environment, credit departments collect their data and monitor their performance. But when it comes to finding out how international credit departments measure and report their performance, the best people to ask are international credit professionals.

There isn't a lot of risk in acknowledging that managing receivables domestically and managing receivables internationally are two different animals. There are similarities, sure, and a great deal of overlap when it comes to some of the broader concepts, but each has its own unique set of circumstances and challenges, and a similarly unique box of tools that can be used to manage them.

Survey Says

FCIB, NACM's international division, conducted a survey among the registered attendees of its International Credit and Risk Management (ICRM) Summit, held in May in Munich. The survey asked the credit and risk professionals about their most-used, mosttrusted, most-important and most-asked-about key performance indicators (KPIs). The sample size was small but diverse, comprised of a majority of fairly large companies with broad industry representation and regional basis almost evenly split, with 50% of respondents' companies headquartered in Western Europe and 41% located in North America, with the remaining from the Nordic countries, the Middle East and North Africa (MENA), and Southeast Asia.

It might disappoint some to learn that the discussion of how international credit departments measure their performance also frequently begins and ends with DSO. When asked "From the following KPIs, rank those which your company currently uses in order of importance, where 1 is most important," 37% of respondents chose DSO as the top, most important KPI, and nearly three quarters of participants chose it as one of their top three most important KPIs.

Complaints about DSO being used as the gold standard for credit department performance assessment were also common, as respondents acknowledged the price and sales biases of the world's most relied-upon credit metric. More than just the often flimsy nature of the pure calculation of DSO, comments from the survey criticized the message that aspiring for lower DSO sends to upper management and to the business world at large. "[I] see too many spending time chasing DSO as an absolute rather than profit," said one participant. "Credit is a profit centre and needs to promote itself as such. DSO is an accounting term, which pushes credit into a back office function. Once the profit achieved is shared as the key metric, it changes the company perception of the business."

This question was phrased to make it more about what the respondents' companies considered important. But later in the survey, when asked to use their own knowledge and expertise to rank their KPIs in order of importance, the results were only a point or two off. Thirty-five percent of participants chose DSO as their first choice based on their own opinions and experiences. Fewer respondents chose it as a second or third choice, but still just over 50% of participants chose DSO as one of their top three.

Of course, DSO's prevalence and broad understanding in the corporate world can account for its popularity to some degree. It's easier to report a metric to a company leader when that company leader understands what the credit professional is talking about, and most business people with even a modest financial background can speak the language of DSO. Part of its popularity comes down to diversity too, since there are so many different ways to calculate DSO. "When you're talking about metrics, everybody knows DSO. Everyone talks about it," said Michael Andreasen, ICCE, working capital process manager for TNT Express in the Netherlands. Andreasen, along with Silvina Aldeco-Martinez, managing director of S&P Capital IQ, delivered a very well-received presentation at the ICRM Summit titled "Benchmarking & KPIs: Best Practices," the primary basis of which was FCIB's survey. Despite its popularity among respondents, Andreasen noted that DSO's popularity and diversity also make it tougher to use.

Apples to Different Types of Apples "First of all, DSO is like saying T like apples' There are so many different kinds of apples out there, and it depends on what kind of flavor, what kind of color apple you like, and it's the same with DSO," Andreasen observed. "There are so many ways of calculating DSO. For me, it's too big a subject."

A simpler, and nearly as popular calculation that's a bit more specific could be found in the second-most chosen KPI, percentage of receivables overdue. It should be noted that in the survey, on a weighted basis, when different values were assigned to a respondent choosing one particular KPI as a first, second, third or other choice, DSO actually didn't turn out to be the most important. That title, considered both from the participant's company's perspective and from their own, belonged to percentage of receivables overdue. While a still estimable 34% of respondents, compared to DSO's 37%, said that their company felt this was the number one most important KPI, a greater number of participants chose it as their second, third and fourth choice, giving it a greater average weight among the survey sample. From the perspective of the participant's knowledge and experience, percentage of receivables that are overdue had an even stronger lead over DSO; despite the fact that only 24% of respondents, compared to DSO's 35%, felt that this was their personal most important KPI, it outweighed DSO overall.

Percentage of receivables overdue shares some qualities with DSO in that it's easy to calculate and easy to understand, but it shares some of DSO's weaknesses as well. "DSO is not the best measurement from the credit perspective," Andreasen said. Similarly, while it'd be tough to say that a credit department with a large percentage of overdue receivables is doing its job well, this metric doesn't account for negligent sales behavior that could be making collections harder and, furthermore, it equates credit performance with collections performance. "If you're looking at credit and collections together, if you're responsible for both," which many survey respondents indicated that they were, "you should look at average days delinquent (ADD)." On a weighted basis, ADD was fourth and third when based on company importance and respondentonly importance, respectively. "That says more about your exposure for me at least," Andreasen said. "That covers both your exposure but also your team's performance."

Benchmarking

Despite the presence of other measures and the imperfections inherent in all of them as far as evaluating credit performance is concerned, DSO remains the world's favorite and is thus the most comparable. To help attendees break DSO, down into something comparable, AldecoMartinez offered some of her company's data pertaining to DSO at the ICRM Summit. According to S&P Capital IQ, the average DSO for companies in North America is 59 days, with Aldeco-Martinez noting that this region is the only one that's exhibited increased collections discipline in the wake of the financial crisis. Western Europe was much higher at 81 days, Asia Pacific was at 80 and emerging markets were at 83, perhaps understandably.

Aldeco-Martinez also offered DSO by industry, showing that the industrial sector had the highest average DSO at 95 days, marking the largest deterioration since the crisis and almost doubling the consumer staples industry, which had the lowest average DSO at 51 days. Information technology had the second highest DSO at 89 days and further down the list was materials at 71 days, having improved marginally from its precrisis struggles.

While there were no countryor customer-specific breakdowns included in Aldeco-Martinez's data, the fact that she shared DSO averages according to two bases-region and industry-is instructive. DSO is calculated the same the world over. Every metric is, but how they're compared can often be the difference. For example, "there's no benchmarking a manufacturing company with a service company," Andreasen noted. It makes sense that despite the use of similar measures, the figures of a concrete provider and a lawyer can't be compared and used as a judge of performance. This lack of comparability remains the same regardless of whether either company is selling abroad and regardless of region or even country for that matter. "Even within Europe, for example, I would never benchmark Finland against Spain because even though they're in Europe and they're both in the European Union and both in the euro zone, they're miles apart in terms of business culture. In Finland you can get away with 7-day or 10-day net payment terms. In Spain they'll laugh at you. When you're benchmarking, these are the things you'll need to think about."

For the most part, credit professionals, whether they're selling to domestic or international customers, know this, or should. Metrics are calculated among businesses with solely domestic accounts according to customer size, segment, location and on down the line. Sometimes these divisions can get too specific and a company can lose itself in one particular, specific metric measured in such a limited way as to render it meaningless. The point is that both domestically and internationally, credit departments measure the same things, but compare them in different ways, not according to where they or their customers are located, but according to their company's strategy.

"When you're looking at benchmarking and measuring, you as a company have to decide what exactly you're trying to achieve...What is the focus of your company's perspective?" Andreasen asked. "Is that getting as much volume, as much revenue as possible? Or are we talking about something else? That can differ from segment to segment and from industry to industry, but even within a particular company that might differ from one year to the next. You need to be aligned from a strategic perspective."

So when asked if there are any differences in the calculations of credit metrics from a domestic or international perspective, Andreasen's answer is simple-. "For me, no."

"It doesn't really matter what you're selling. If you're selling a manufactured good or a service you're still sending the customer an invoice and you're expecting them to pay that invoice. It doesn't really matter whether you're selling it internationally or domestically," he added. It might be boring, but while there are many things that separate the management of domestic risks from the management of international ones, here, in the vital process of measuring metrics and benchmarking performance, they're aligned very closely. There aren't any secret measurements that are for international sales only. Credit and risk management might not always be a universal language, but mathematics is. 1

In the US, the subject of how a credit department measures and reports its performance to its upper management begins and ends with days sales outstanding (DSO).

It might disappoint some to learn that the discussion of how international credit departments measure their performance also frequently begins and ends with DSO.

It might be boring but while there are many things that separate the management of domestic risks from the management of international ones, here, in the vital process of measuring metrics and benchmarking performance, they're aligned very closely. There aren't any secret measurements that are for international sales only.

By Jacob Barron, CICP

Jacob Barron, CICP, NACM staff writer. The full results of FCIB's KPl survey can be found at www.fcibglobal.com.