Cutting DSO: A Good Defensive Strategy for Tackling the Economic Downturn

By Mary M. Collins

The beach umbrellas are back in the shed, the kids are back in school and the NFL is eclipsing MLB in above-the-fold sports news.  This can only mean one thing: it’s budget season.

Of course the good news this year, as highlighted by the back-to-back Democratic and Republican National Conventions, is that we have a Presidential election to bolster our revenues and give us some momentum going into the Fourth quarter.

Convention rhetoric about the economy aside, conventional wisdom tells us that developing next year’s budgets involves addressing an even bigger challenge than the media industry faced this time last year.  In addition to not having political advertising’s contributions to our ad sales business, there is uncertainty about how soon we can anticipate an upswing in consumer spending, a key metric for our advertisers.

While jumpstarting the economy or fixing the consumer credit crisis may be beyond our control, there are some credit issues that we can address as part of improving the economic outlook for our companies.

One of the ways to determine a company’s economic strength, its ability to optimize its credit and collections practices, is its DSO – the Day Sales Outstanding ratio.  DSO is a measure of how long on average it takes a company to collect the money it’s owed.  The DSO ratio is calculated by dividing a company’s total accounts receivable by the average net sales per day.  This metric gives financial managers and analysts the average number of days of sales remaining unpaid.

This definition, along with a number of practices for improving DSO, are outlined in MFM’s “Understanding Broadcast & Cable Finance, A Primer for Nonfinancial Managers” handbook, which is now in its second edition.  In addition to measuring DSO internally, a number of MFM-affiliated companies exchange their DSO data as a means to determine how their DSO compares with an industry benchmark.

As you would expect, a station’s DSO can increase when business is down for its advertisers.  Delaying payments is a tried-and-true way of increasing short-term cash flow.  Not only does this increase your DSO, it also increases the probability that the debt will go unpaid.  On the other hand, deceasing DSO not only cuts potential bad debt write-offs, it also increases your cash flow.  Let me share an example from Anthony Vasconcellos’ (EVP/CFO of Regent Communications) “Cash Flow Measures and Reports” chapter in the “Handbook”:

A quick example shows the cost of financing customer accounts.  If current receivables indicate days sales outstanding (DSO) of 90 days, and monthly net revenue averages $2,000,000, a company is financing customers to the tune of $6,000,000 (90 days of revenue in receivables).  If collections were improved by 20 days, the average receivable balance would decrease by approximately $1.3 million.  Using an interest rate of 10 percent, the 20-day improvement would result in a savings of $130,000 annually in finance charges, which may even justify hiring an additional employee in the Collections Department.

The other potential issue here is that delayed payments can be an indication of deeper financial problems that can ultimately result in the advertiser seeking the protection of bankruptcy court.  A July 2, 2008, Bloomberg News article published in the “International Herald Tribune” says “The softening economy and the collapse of the housing market caused U.S. businesses to file for bankruptcy protection at a higher annualized rate than individuals.”  This is not good news for your business or your DSO.  
To pull from the NFL playbook – a good defense is the best offense.  The best way for a company to maintain a good DSO ratio during a down economy is by shoring up its credit and collections practices, beginning with extending credit only to companies that are the likeliest to pay.  

Credit reports are key defensive players for ad-supported media.  Ironically, a pennywise and pound-foolish decision that some companies make is to cut back on their credit research when the money gets tight.  As the DSO metric suggests, a company’s liquidity depends upon the money it actually collects, not the services it provides in anticipation of that revenue.  The best way to avoid “irrational exuberance” over a new advertiser is by getting data that help to provide a reasonable assurance that the prospect can, and will, pay in accordance with the terms of the agreement.

Of course, the ideal situation is high-value credit information at the lowest possible price.  This is one of the services MFM provides to the media industry through its BCCA subsidiary.  In addition to serving as a resource for best practices for credit and collections, BCCA provides industry-specific credit reports that give members a factual basis for determining the creditworthiness of new clients.

The BCCA Credit Reporting Service currently contains more than 25,000 credit reports on individual agencies, advertisers, or buying services (National and Local).   BCCA members may access current reports on-line anytime and can get new, updated or current reports or by phone or fax at no extra charge during BCCA’s normal business hours.  BCCA’s credit investigators conduct in-depth research on new companies based upon our members’ requests.  They add an average of  500 to 600 new companies to the database every month and update reports on another 200-300 in the same time period.
MFM member Dwight Delapenha, a partner at Grant Thornton, LLP, also advises media companies looking to maximize their returns in the current economy to update credit checks on existing customers.  He says this is the best way to ensure that they remain as creditworthy as they were before the downturn.

Delapenha will be moderating an MFM Distance Leaning Seminar entitled “Recession Readiness - Strategies to Succeed in a Down Market”  later this month.  Scheduled for Thursday, September 25, from 4:00 - 5:15 p.m. ET, the CPE teleconference will provide insights into how media companies can turn the challenges of the current economic environment into opportunities for strengthening their competitive position.

As you would expect, credit and collections represents a make-or-break category for achieving that level of success.  The Seminar will spend a fair amount of time going over specific activities that can improve both DSO and the bottom line.  To give you a little pre-game preview, Delapenha can be expected to discuss strategies for:

Retaining key profitable customers;

Minimizing collection risk;

Reducing or eliminating unprofitable sales;

Cutting unprofitable customers

Incenting sales organization to ensure profitable sales; and

Improving collection efforts.

The Seminar will also cover cost-reduction strategies and employee retention strategies, including “The Right $pend on the Right Talent.”

This discussion is well-timed for budgeting.  While there seem to be plenty of data for suggesting the rate of decline in traditional ad spending for radio and television, those forecasts don’t predict the results of an individual station or company.  In addition to improving the results of their traditional revenue streams, broadcasters are just as likely, if not more likely, to capitalize on the forecasted growth for new media advertising.  As the legendary college football coach Knute Rockne observed, “Setting a goal is not the main thing. It is deciding how you will go about achieving it and staying with that plan.”

Mary M. Collins is President and CEO of the Media Financial Management Association (MFM)

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