The DSO Yo-Yo Effect. Or: How to ensure sustainable Working Capital improvements?

Heidelberg (Germany) – Everybody knows the yo-yo effect. (“Yo-yo dieting or yo-yo effect, also known as weight cycling. The term “yo-yo dieting” was coined by Kelly D. Brownell at Yale University, in reference to the cyclical up-down motion of a yo-yo. In this process, the dieter is initially successful in the pursuit of weight loss but is unsuccessful in maintaining the loss long-term and begins to gain the weight back. The dieter then seeks to lose the regained weight, and the cycle begins again.” http://en.wikipedia.org/wiki/Yo-yo_effect.) A similar cyclical effect is pretty common in our efforts to optimize our Days-Sales-Outstanding (DSO). Why is this so? As long as the business doesn’t really suffer the DSO optimization is left more or less to the Finance people only. And as soon as the business really suffers the only measures with short-term effect are the ones Finance can execute (e.g. more rigorous dunning etc). Hence we tend to believe that DSO and Working Capital is a matter of Finance only. This is as far from the truth as it gets. Because most of our working capital is bound by our operations. We have to pay our suppliers (and our employees). We are stocking unsold goods in our inventory. And we are getting paid by our customers for what we ship. Thus only changing our operations would change our cash position sustainably. That’s a no-brainer so far (or?). We have to change our operational processes in order to improve our free cash. As simple as this. But which, how and when? That’s the Gordian knot in our business. Because we, funnily enough, don’t know which process...