5 Accounts Receivable KPIs That Your Business Should Track

In a bid to close deals faster and grow the business overall, companies are increasingly offering credit as an acceptable form of payment. While this does result in a lot more customers that are happier, it also puts the business at risk of delayed payments and bad debts. Effective accounts receivable management, therefore, becomes the critical to ensuring that your company is getting paid on time. Let us try to understand what are accounts receivable KPIs and how tracking them can improve your bottom line.

What are Accounts Receivable KPIs?

It is important to understand that there are close to a dozen standard accounts receivable KPIs and it is impossible to measure all of them. The key metrics will vary from company to company, and may even change with time, as a business continues to grow. We will try to list down a few common accounts receivable KPIs that can help keep track of the financial health of your receivables.

5 Accounts Receivable KPIs That Your Business Should Be Tracking

1. Days Sales Outstanding (DSO): Probably one of the most common, yet most important accounts receivable metrics, DSO measures the number of days it takes for a business to collect payment from customers once a sale has been made. A low DSO indicates that the accounts receivable department is functioning efficiently while a higher DSO means that your business is not collecting payments as proactively as it should, which in turn could hamper the overall cash flow.

2. Average Days Delinquent (ADD): Calculated as a by-product of DSO, Average Days Delinquent is used to calculate the average number of days a customer takes to make a payment from when it’s due. ADD is calculated by measuring the difference between the actual Days Sales Outstanding (DSO) and the best possible DSO.

For instance, your regular DSO is 60 days and your best possible DSO is 40 days, then it means that your customers are taking 20 days to pay their invoices after they are due. This metric can prove to be useful in identifying bad debts, before they become an issue for your business.

3. Collective Effectiveness Index (CEI): Collective Effectiveness Index (CEI) is an accounts receivable KPI that helps companies measure how well the AR team collects outstanding payments within a specified time period. Businesses constantly aim to achieve a 100% CEI, which means that all money owed by customers, say in a month or year, was collected. While a perfect 100 is very difficult to achieve, anything about 80% means that the accounts receivable department is functioning well.

The formula for calculating your collections effectiveness index is:

 4. Bad Debt to Sales Ratio: A simple to calculate yet important accounts receivable KPI, bad debt to sales ratio measures the percentage of credit sales that go uncollected and turn into bad debts. Higher bad debt to sales ratio indicate that accounts receivable teams are either not issuing invoices proactively or chasing on payments effectively. In the traditional sense anything below 15% is considered to be a good bad debt to sales ratio while anything above 25% indicates that you need to take immediate action.

The formula for calculating the bad debt to sales ratio is:

 5. Operational Cost Per Collection: As the name suggests, Operational Cost Per Collection is an accounts receivable KPI that measures the amount of money an organization spends on collecting money owed to customers. As a KPI, this one enables you to look beyond receivables and gauge the effectiveness of teams, processes and platforms that your company depends on. Modern, rapidly growing business often turn to accounts receivable automation solutions, or accounts receivable outsourcing services to keep their operational cost per collection in check.

QX Global Group: Your Partner in Accounts Receivable Optimization Initiatives

QX Global Group is a global Business Process Management (BPM) company offering comprehensive back-office services to businesses across industries. We work with our clients to deploy world-class teams of accounting experts, industry-best practices and latest technology to optimize accounts receivables. We also leverage data & insights, which allows our clients to track key accounts receivable KPIs and stay on top of their collections. Schedule a free, no-obligation call with our experts to kickstart your accounts receivable transformation journey.

Originally published Jun 24, 2022 06:06:17, updated Jun 27 2022

Topics: Accounts Receivable Process