5 KPIs To Track for Accounts Receivable

Every B2B company should diligently track 5 essential Key Performance Indicators (KPIs) within their Accounts Receivable (AR) processes. Effective management of AR is crucial for maintaining healthy cash flow and optimizing financial operations. By focusing on these KPIs, you can gain valuable insights into your collections performance, identify potential areas for improvement, and ultimately enhance the overall financial health of the business.

Whether you're a seasoned financial professional or new to managing AR, understanding and leveraging these metrics will be instrumental in achieving your business objectives. Before getting into the specific KPIs for AR, let’s review the general importance of these business “measuring sticks.”

Understanding the Value of KPIs

KPIs are quantifiable metrics used to evaluate the success or performance of an organization in achieving its strategic and operational goals. These indicators serve as vital tools in measuring progress, identifying areas for improvement, and making informed decisions based on objective data. By defining specific KPIs relevant to each department or function within a company, businesses can track performance over time, benchmark against industry standards, and align efforts with overarching business objectives. Ultimately, KPIs provide a clear and measurable way to assess performance and drive continuous improvement across all levels of an organization.

Key Performance Indicator #1: Average Days Delinquent 

Average Days Delinquent (ADD) serves as an important metric for evaluating collections efficiency, providing essential insights for quick assessments and comprehensive overviews. The calculation of ADD is straightforward, relying on two primary data points: the due date specified in invoices and the actual payment date of receivables, both documented in official records and contracts.

This uncomplicated metric remains invaluable in industries focused on quantitative analysis, offering a reliable gauge without the complexities of more advanced analytical tools. Its simplicity minimizes the burden on Accounts Receivable (AR) teams while delivering actionable insights.

Top-performing companies often achieve an ADD of fewer than 10 days, showcasing exemplary collections practices. Conversely, average organizations typically operate with an ADD of approximately 30 days. A higher than average ADD may indicate underlying issues in collections performance, prompting businesses to explore more sophisticated metrics to pinpoint specific areas needing improvement.

Key Performance Indicator #2: Days Sales Outstanding (DSO)

Days Sales Outstanding (DSO) stands as one of the most widely tracked KPIs in AR management. This metric's popularity stems from its ability to provide valuable insights into customer payment behaviors, essential for identifying and resolving inefficiencies in the collections process. DSO calculates the average number of days it takes customers to settle their invoices, offering a clear snapshot of cash flow dynamics across different stages and customer segments.

By pinpointing persistent late payers that contribute to elevated DSO levels, businesses can prioritize collections efforts and refine strategies to expedite payments. This data reveals potential bottlenecks on the customer side that may not have been apparent previously, highlighting areas for targeted improvement. Fluctuations in DSO also serve as a barometer for assessing the impact of strategic initiatives and market conditions on payment cycles.

Despite its utility, DSO has limitations in that it only addresses receivables once they are overdue, thereby limiting its ability to preemptively influence payment behaviors. Complementing DSO with other metrics enables you to adopt a more proactive approach to AR management, ensuring more comprehensive insights and strategic decision-making to optimize cash flow and financial performance.

Read this case study to learn how a bath product company quickly reduced its DSO.

Key Performance Indicator #3: Percentage of Current Accounts Receivable

DSO provides insight into overdue receivables, but it overlooks proactive management of accounts before they become overdue. This limitation underscores the importance of tracking the Percentage of Current Accounts Receivable as a complementary metric.

The Percentage of Current Accounts Receivable offers a balanced view of the distribution between current and overdue receivables. It enables teams to proactively manage high-value accounts approaching their due dates, rather than solely focusing on collections after payments have become overdue.

This KPI drives a fundamental shift in Accounts Receivable departments by advocating for a proactive approach. It encourages teams to prioritize accounts based not only on their age but also on their value and associated risks. By emphasizing timely management of current receivables, teams can enhance cash flow, expedite collections, and allocate resources more effectively, thereby reducing the effort spent on delinquent accounts with diminishing prospects of recovery. This strategic focus supports a transformative mindset within AR departments, optimizing performance and delivering sustainable financial outcomes.

Key Performance Indicator #4: Collections Effectiveness Index (CEI)

Efficient management of cash flow hinges on understanding and addressing inefficiencies within the collections process. While metrics like DSO provide a general overview, pinpointing specific areas for improvement requires more nuanced insights. The Collections Effectiveness Index (CEI) serves this purpose by measuring the effectiveness of the collections department in recovering overdue payments within a defined timeframe. It calculates the percentage of receivables collected compared to the total outstanding, offering a clear indicator of performance.

Businesses should aim to achieve a CEI of above 80%, indicating a high level of effectiveness in recovering outstanding payments. A decline in the CEI signals potential obstacles in the collections process that need attention, such as customer financial health, targeted account strategies, or overall team performance. By monitoring CEI alongside other metrics, organizations can proactively identify and address operational challenges, ensuring robust cash flow management and sustained financial health.

Key Performance Indicator #5: Operational Cost Per Collection

During periods of significant market shifts and environmental changes, businesses often prioritize short-term recovery and growth. However, it’s equally crucial to maintain a focus on long-term development when making strategic decisions across the business.

The Operational Cost Per Collection KPI plays a pivotal role in enhancing the efficiency of the collections process. It evaluates the operational costs incurred by the collections team in relation to the number of collections made. Unlike metrics solely based on receivables, this KPI considers broader operational data to optimize efficiency and reduce costs associated with collection efforts. Typical operational costs include:

• Personnel Costs: Salaries, wages, benefits, and training expenses for collections staff.
  
  
• Technology Costs: Expenses related to software systems, CRM tools, and other technology used for managing and tracking collections.
  
  
• Communication Costs: Costs associated with phone calls, emails, and postage used to communicate with customers regarding overdue payments.
  
  
• Legal and Compliance Costs: Fees for legal counsel, compliance monitoring, and regulatory reporting related to collections activities.
  
  
• Administrative Costs: Overhead costs such as office space, utilities, and administrative support necessary for collections operations.
  
  
• Collection Agency Fees: Costs incurred when outsourcing collections to third-party agencies or legal firms for more challenging accounts.
  
  
• Training and Development: Costs for ongoing training programs and professional development to enhance the skills and efficiency of collections staff.

While primarily a tool for long-term planning, the Operational Cost Per Collection KPI may not yield immediate solutions or enable direct comparisons with competitors, as it focuses on internal data within the organization. Nevertheless, when used effectively, it provides valuable insights that guide strategic decisions within the AR team. It underscores the importance of proactive measures in identifying internal efficiencies and maximizing collection capabilities over time, thereby contributing to sustained organizational growth and financial health.

The Key to Using KPIs

The key to effectively using KPIs lies in their strategic alignment with your organizational goals and their consistent application as actionable metrics. KPIs are not just numbers; they are tools that provide critical insights into performance across various facets of an organization.

By selecting KPIs that directly reflect key objectives and aligning them with AR targets, you can measure progress, identify areas for improvement, and make informed decisions. Regular monitoring and analysis of KPIs enable proactive adjustments to strategies and tactics, fostering a culture of continuous improvement and accountability. 

Having a clear understanding of KPIs throughout your business ensures that they are used as drivers of change and as benchmarks for success, ultimately guiding effective resource allocation and enhancing overall performance and competitiveness.

FINAL THOUGHTS

Using advanced technology that leverages AI and machine learning makes tracking KPIs infinitely easier. Payference is an AI-driven all-in-one cash management platform that increases efficiency in AR processes, improves overall accuracy and accelerates payments. 

Our customers achieve significant reductions in DSO and speedier payments which can generate over 10x ROI.

P.S. Want to learn more about how Payference can help you track KPIs? It's easy to schedule a demo at a time that’s convenient for you.