Top Priority KPI’s for Accounts Receivable

Managing accounts receivable is crucial for any business’s cash flow. Key performance indicators (KPIs) like Days Sales Outstanding (DSO), Accounts Receivable Turnover Ratio (ART), and Bad Debt to Sales Ratio give you the real picture of your collection game. By keeping tabs on these numbers, you can spot problems, cut down on errors, and boost your cash flow. This is all about staying financially strong.

What are accounts receivables KPIs?

Accounts receivable key performance indicators are the metrics that are used to analyze the effectiveness of the company’s account receivable team or process.

Analyses of KPIs are vital for interpreting the company’s account receivables section and cash flow. By evaluating the following metrics, you will have the means to

·         Find the promptness of payments of the bills by the customers.

·         Determination of problems related to customer payments

·         Analyzing the effectiveness of accounts receivable procedures

Most Important accounts receivable KPIs to know

Information about KPIs is important in accounts receivable as it is one of the vital parts of managing cash flow effectively and safeguarding the business so it can be on track. Following is the breakdown of the most important KPIs that need to be explored:

1) Days Sales Outstanding (DSO)

Days Sales Outstanding (DSO) is the number that tells that how rapidly the customers are paying back their bills. It can be found by dividing the total of the accounts receivable amount by the average of daily sales revenue.

The smaller the number of days sales outstanding the better it is and on the other hand the larger the number implies that the collection of payments is slower that ultimately impacts the cash flow.

You can find DSO by the help of this formula: –

DSO = (accounts receivable/total credit sales) * number of days

This formula shows how many days it took on an average basis from the time a sale is generated to when the payment is actually received.

2) Average days in delinquency

The average days in delinquency is a KPI that is used in accounts receivable that shows the average duration (in days) a customer took to pay their bills after the due date.

This measurement is vital because it assists in making predictions about when the bad debts can become a problem for the company. Ignoring this KPI will result in the creation of more problems related to financial well-being because of bad debts and late payments that are abrupt.

For measuring average days in delinquency here is what you need: –

ADD = regular DSO – best achievable DSO

For example, if the company’s best achievable DSO is 40 days and the regular DSO is 60 days, then the average days delinquent will be 20 days.

3) Accounts receivable turnover ratio (ART)

Accounts receivable turnover ratio (ART) is a ratio that demonstrates how swiftly the AR department is accumulating payments and changing money into cash. It can be measured by dividing the net sales by the average of accounts receivable.

formula for the measurement accounts receivable turnover ratio

ART = net credit sales ÷ average accounts receivable

For instance, your ART would be 25% if your sales were Rs. 50,000,000 and your accounts receivable were Rs. 40,000,000.

4) Collections Effectiveness Index (CEI)

The Collections Effectiveness Index (CEI) tells you how well your business collects payments. It’s crucial for tracking how much cash you’re missing out on due to bad debts. The higher the CEI, the less efficient your collections team is at grabbing the money owed.

To calculate CEI, you divide the number of delinquent accounts by the total active accounts receivable. Here’s a formula example:

If your company starts with Rs. 100,000 A/R, does Rs. 200,000 in credit sales, and ends with Rs. 120,000 A/R, the formula is:

CEI= (100,000+200,000–120,000) (100,000+200,000–120,000) ×100

If your CEI is high, your team isn’t doing enough to get that money flowing in, either because of poor communication, bad invoicing, or slacking on follow-ups.

5) Bad Debt to Sales Ratio

Bad debt happens when customers don’t pay up, and this ratio shows how big that problem is compared to your total sales. Your bad debt to sales ratio tells you how much revenue goes uncollected.

The formula? Simple. Take your total bad debts and divide it by your total sales.

For example, if you have Rs. 40,000 in bad debt and Rs. 200,000 in total sales, that’s a 20% bad debt ratio.

You want this number below 15%. Anything above 25% is a major red flag that you’re bleeding revenue. Get that under control, or it’ll crush your profits.

6) Write-Off Ratio

The write-off ratio is the percentage of your accounts receivable you just give up on—money you officially write off as bad debt. This metric shows how much your collection efforts are failing.

Writing off bad debts cuts deep into your predicted profits. It’s essential to track this metric because if your collections team can’t manage risky customers, your growth is dead in the water.

To calculate the write-off ratio, divide your bad debt expense by your total accounts receivable.

For instance, with Rs. 1,000 in bad debt and Rs. 10,000 in receivables:

Write-off Ratio= 1,000/10,000 ×100=10%

Keep that ratio as low as possible.

7) Right Party Contacted (RPC) Rate

Your Right Party Contacted (RPC) Rate measures how often your collection efforts actually reach the correct person. If you contact the wrong people, you’re just wasting time.

For example, if you send 200 payment reminders, but only 190 reach the right person, your RPC is 95%. A high RPC means you’re getting through to the right folks, and that should make collections easier. A low RPC means you’ve got problems—maybe bad data, wrong emails, or poor onboarding practices.

Set clear guidelines to ensure your team gathers accurate contact info. Target the right people, or your collections will fall flat.

8) Operational Cost per Collection

Operational cost per collection looks at how much cash you burn collecting payments. This includes employee hours, postage, phone bills—everything you spend chasing down customer payments.

You want this number as low as possible. If you’re paying more to collect than you’re actually collecting, you’re losing the game. To cut down these costs, consider automating tasks like payment reminders and customer statements. Automation keeps your team from wasting time and lets the software do the heavy lifting.

9) Deduction Days Outstanding (DDO)

Deduction Days Outstanding (DDO) tells you how long it’s taking to collect payments. Time is money, and the longer invoices stay unpaid, the worse it is for you.

To calculate DDO, divide the total number of days invoices have been outstanding by the average number of invoices per day. This will give you the number of days it takes to collect on all outstanding payments in a year.

Lower DDO = quicker payments. Keep it down to avoid cash flow issues and high collection costs. The faster you get paid, the healthier your business stays.

10) Number of Revised Invoices

If you’re frequently revising invoices, that’s a red flag. It usually means your invoicing process is off, plagued by human mistakes or system glitches. Maybe the credit terms are wrong, or the invoice doesn’t match the service provided.

To get paid faster, you need a smooth, effective process. Sending the wrong invoice to the wrong customer, or having mistakes on invoices, only leads to confusion. This delays payments and can strain your relationship with customers, potentially hurting your future sales.

Tracking how many invoices you revise each month is a smart way to measure your accounts receivable performance. It highlights where you need to step up and helps your AR team collect cash more effectively.

If revised invoices are a constant issue, it’s time to ditch outdated accounting systems or manual processes. They slow you down and increase errors. Instead, think about switching to a cloud accounting system and automating your accounts receivables. These tools keep your data accurate and up-to-date, saving time and cutting down on invoicing mistakes.

Questions to Understand your ability

Que.1 What does Days Sales Outstanding (DSO) actually measure?

A) How long customers take to pay after the due date

B) How fast a company collects cash from customers

C) The total sales figures of a business

D) The percentage of bad debts compared to sales

Que.2 If a company has a best achievable DSO of 30 days and a regular DSO of 50 days, what’s the average days in delinquency?

A) 20 days

B) 15 days

C) 25 days

D) 10 days

Que.3 The Collections Effectiveness Index (CEI) tells you what?

A) How well the company’s marketing is doing

B) How effective the collections team is at grabbing payments

C) The total number of sales transactions

D) The average number of invoices sent out

Que.4 What’s the target Bad Debt to Sales Ratio you want to hit?

A) Below 10%

B) Below 15%

C) Below 20%

D) Below 25%

que.5 What does the Write-Off Ratio measure?

A) The percentage of accounts receivable that gets collected

B) The amount of bad debt you’ve given up on

C) How quickly you receive payments

D) The effectiveness of your customer follow-ups

Conclusion

Key performance indicators help in the smooth flow of the invoicing process as well as boost cash flow. Modern accounting systems and automation enable the identification of errors and accelerate the collection process. This approach fosters cordial relationships with customers. This is the approach for the business that wants to get on the path of long-term success.