Anyone who’s worked in finance in the last 15 years will tell you the responsibilities and role of the Chief Financial Officer (CFO) has evolved way beyond mere number crunching. Today’s smart CFO harnesses data to drive strategic decisions, optimize processes, and ensure the financial health of the organization.
Among the various financial reports available, accounts receivable (AR) reports hold a special significance, offering crucial insights into cash flow, customer behavior, and overall business performance. In this article, we’ll highlight five essential reports that CFOs can leverage to steer their organizations toward success.
Accounts receivable reports are valuable tools CFOs can use to gain insights into the business’s financial transactions–key customer accounts, outstanding revenue and customer debt. With an overview of your AR over a specific period of time, you’re better positioned to effectively manage the financial performance of the company. Some of the more common types of reports are the following:
Whether you want to identify and manage bad debt or improve cash flow by decreasing DSO, the information contained in these reports presents an accurate view of your financial position. The metrics generated play a critical role in helping CFOs assess financial performance and make decisions that will ultimately optimize cash flow and drive profitability.
Traditionally, gathering the data and preparing these reports was a labor intensive task that could take AR teams days, even weeks to create. Fortunately, in today’s marketplace there are plenty of cash management solutions–especially those powered by AI–that can quickly and almost effortlessly produce these reports based on real-time data.
Tracking your accounts receivable performance provides an understanding–based on data–of how that particular part of the business is doing. You’ll have far more than a “gut feeling” of what is working and what is not.
You should closely monitor your AR metrics with a select menu of reports. In addition to the types of reports mentioned above, there are even more KPIs you could track. How do you know which are most relevant to your company? For starters, choose the reports that focus on performance and align with your business goals. And keep in mind that the reports you find most useful may change over time. But for staying on top of cash flow challenges, collections and invoice disputes, here are 5 key reports that most businesses will find helpful.
Days Sales Outstanding (DSO) is a baseline performance metric that measures the average number of days it takes for a company to collect payment after making a sale. Calculated by dividing accounts receivable by average daily sales, then multiplying the result by the number of days in the period, DSO provides valuable insights into the efficiency of a company's accounts receivable management. A low DSO indicates that you’re collecting payments quickly, which is typically favorable as it indicates healthy cash flow and efficient credit and collection processes. Conversely, a high DSO suggests that customers are taking longer to pay their invoices, potentially signaling liquidity issues, ineffective credit policies, or deteriorating customer relationships.
Smart CFOs closely monitor DSO as part of their financial analysis toolkit, using it to assess the effectiveness of credit and collection strategies, identify areas for improvement, and optimize working capital management. By benchmarking DSO against industry peers and historical performance, CFOs can gain a clearer understanding of their company's cash flow dynamics and take proactive measures to accelerate receivables turnover. Additionally, DSO serves as a key performance indicator for assessing the overall financial health of the organization and informing strategic decision-making related to pricing, credit terms, and customer segmentation.
Average Days Delinquent (ADD) is a financial metric that provides insights into the average number of days that outstanding invoices remain unpaid beyond their due date. It is calculated by summing the number of days each invoice is past due and dividing by the total number of invoices. This metric helps CFOs assess the effectiveness of their credit and collection policies, as well as the overall health of their accounts receivable portfolio. A lower ADD indicates that customers are paying invoices closer to their due dates, which is generally preferable as it signifies better cash flow management and more timely collections. Conversely, a higher ADD suggests that customers are consistently late in paying their invoices, which can lead to cash flow constraints and increase the risk of bad debt.
You can leverage ADD to identify trends in payment behavior, pinpoint customers with persistent delinquencies, and implement targeted collection strategies to reduce outstanding balances. By analyzing ADD over time and across customer segments, you’ll be able to identify root causes of delinquency, such as billing errors, disputes, or financial difficulties, and take proactive measures to address them. Additionally, tracking ADD allows you to set realistic targets for reducing delinquencies, optimizing working capital, and enhancing the overall financial performance of the organization.
The Turnover Ratio measures how efficiently a company manages its credit sales and collects payments from customers. Also known as the Accounts Receivable Turnover Ratio, it quantifies the frequency with which a company converts its accounts receivable into cash within a specific period, typically a year. The ratio is calculated by dividing net credit sales by the average accounts receivable balance during the same period. A higher turnover ratio indicates that a company is effectively managing its accounts receivable, swiftly converting credit sales into cash, and minimizing the time it takes to collect payments.
Monitor the Turnover Ratio to gauge the effectiveness of your credit and collection processes and identify opportunities for improvement. By analyzing trends in the turnover ratio over time and comparing it to industry benchmarks, you can assess the efficiency of your receivables management practices and optimize working capital utilization. Moreover, a low turnover ratio may indicate potential liquidity issues or poor credit quality among customers, prompting CFOs to review credit policies, tighten collection procedures, or reevaluate customer relationships to mitigate risks and enhance cash flow.
A companion metric to Turnover Ratio, the Collection Effectiveness Index (CEI) is a metric used by CFOs to evaluate the efficiency of their company's accounts receivable management and collection processes. Whereas the turnover ratio shows how often your accounts turnover, the CEI shows how many. It quantifies the effectiveness of collections by comparing the amount of cash collected within a specific period to the total outstanding accounts receivable balance. Typically calculated monthly, quarterly, or annually, the CEI provides insights into how well a company converts its outstanding receivables into cash. A higher CEI indicates that a company is successful in collecting payments from its customers promptly, thereby reducing the average DSO and improving cash flow.
Savvy CFOs will leverage the CEI to assess the performance of their accounts receivable team, set targets for collection efficiency, and drive continuous improvement initiatives. By tracking CEI trends over time and benchmarking against industry standards, you can identify areas for enhancement in credit policies, collection procedures, and customer communication. Moreover, the CEI serves as a valuable tool for forecasting cash flow, optimizing working capital management, and strengthening the financial health of the organization.
A report on the number of revised invoices is an essential tool for CFOs to monitor and manage discrepancies or changes in billing transactions. This report tracks the frequency and nature of revisions made to invoices after their initial issuance, providing insights into the accuracy and integrity of the company's billing processes. By analyzing the number of revised invoices, you can identify common issues such as billing errors, pricing discrepancies, or contract renegotiations, making it easier to take more effective corrective actions to improve invoicing accuracy and customer satisfaction. Moreover, this report helps you assess the efficiency of your accounts receivable and billing teams, highlighting areas for training or process improvement to minimize the occurrence of invoice revisions and streamline the billing workflow.
You can leverage the insights derived from this report on revised invoices to enhance financial controls, mitigate revenue leakage, and maintain compliance with accounting standards. By implementing automated invoicing systems, conducting regular audits, and implementing stringent validation procedures, you can reduce the incidence of billing errors and ensure the accuracy and timeliness of invoice issuance. Additionally, analyzing trends in revised invoices enables you to anticipate potential challenges in revenue recognition, cash flow forecasting, and financial reporting, allowing them to proactively address issues and maintain the financial integrity of the organization.
As mentioned earlier, there are many accounts receivable reports you could leverage to improve financial performance, but Days Sales Outstanding, Average Days Delinquent, Turnover Ratio, Collection Effectiveness Index and Number of Revised Invoices are 5 of the most common ones to focus on when you want to optimize cash flow, mitigate risks, and drive sustainable growth. By harnessing the insights derived from these reports, CFOs can make informed decisions, streamline financial processes, and propel their organizations toward long-term success.
Payference is an all-in-one cash management platform that leverages AI to increase efficiency in AR processes, improve accuracy and accelerate payments. Interested in learning more? Reach out and schedule a short, no-pressure demo today.