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A rising DSO indicates that your collections are not matching the rate of new sales, and if that goes on for any length of time, your cash flow will not be able to support the volume of your current business operations.
Use the following formula to determine your CEI: (Beginning receivables + Monthly credit sales - Ending total receivables) ÷ (Beginning receivables + Monthly credit sales - Ending currentreceivables). Then multiply the answer by 100 to get a percentage.
Who absorbs any potential baddebt loss — does the lender have recourse to return the AR if they cannot collect it versus a non-recourse arrangement? Who performs the Credit & Collection activities — you or the finance company? If your collection efforts have been a bit haphazard, you will want to tighten them up.
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