Tracking the performance of your accounts receivable helps your financial organization understand what’s working well and what needs improvement. Monitoring your A/R metrics closely is the first step toward improving business performance.
However, there are dozens of accounts receivable KPIs. How should you choose which to track? The most relevant metrics will vary from company to company, and they may also change over time, along with your business goals. A good rule of thumb is to focus on the metrics that bring performance into focus.
Here are some top accounts receivable KPIs that offer valuable insights into financial performance:
Days Sales Outstanding (DSO)
Accounts receivable must closely track how long it takes on average to collect payments. This metric is the most baseline performance metric there is, which is why almost everyone monitors it. Observing when DSO rises or falls also helps reveal how market forces affect payment times. According to a recent benchmarking survey by APQC, top performing companies have a DSO below 30 days, while low performing companies have a DSO of 48 days or longer.
Average Days Delinquent
The average days delinquent metric indicates how many days on average payments are overdue. The goal is to get this number as low as possible by encouraging clients to pay quickly. If the number is high, it could point to problems within accountants receivable, or within the larger company. For example, if several payments are long overdue, you could be targeting the wrong customers, or your business could be suffering from understaffing.
Companies commonly track this metric to learn how often they convert accounts into cash over a set period, typically a year. It provides helpful insights into a company’s liquidity and cash flow while also indicating how effective the company is as collecting revenue. A high ratio suggests there are lots of open accounts and unrealized revenue, which could mean it’s time to reconsider credit or collection policies.
Collection Effectiveness Index (CEI)
Think of this accounts receivable KPI as a companion metric to the turnover ratio. However, instead of indicating how often accounts turn over, CEI shows how many accounts turn over. A higher number indicates that companies are collecting on most of their accounts. Tracking when and why CEI rises and falls helps companies move closer to collecting on 100 percent of their receivables.
Number of Revised Invoices
Invoicing is at the heart of accounts receivable, so it’s essential to track how often invoices have to be revised. If the number is trending upward, it could mean that your accounts receivable department needs additional support or that invoicing policies need revision. Ideally, companies would never have to revise invoices, which creates unnecessary delays in payment.
Track it All with Business Dashboards
The next step to improving accountants receivable performance is to implement dashboards. Once you start tracking the metrics that matter, those insights need to be available to all stakeholders across the organization quickly and easily. Dashboards provide users with an instant glimpse into accounts receivable performance by combining metrics, visualizations, and intuitive tools into one interface.
The final step is learning how to make optimal use of your new dashboards. Optimizing your business dashboards transforms insight into action. Download our free guide to driving dashboards like a boss for everything you need to know!