In this article, we will discuss 3 easy-to-implement and measurable KPIs to track your team’s performance as well as provide the equations needed to calculate each KPI.
By tracking these accounts receivable performance metrics, you will be able to identify areas of improvement and make data-driven decisions about how to improve your accounts receivable process and results.
What are accounts receivables KPIs?
Accounts receivables key performance metrics, or KPI’s are performance metrics used to track the success of your accounts receivable team or process. For this article, we’ll be defining accounts receivable as the money owed to a company, for the products or services it has provided, that have not yet been paid.
Tracking key these KPIs is important for understanding and improving your company’s accounts receivables process and cash flow. By monitoring the following metrics, you will be able to:
Measure how quickly customers are paying their bills
Identify problem areas with customer payments
Evaluate the effectiveness of your accounts receivable process
Assist your accounts receivables team in improving their efficiency (your sales team uses KPIs and targets, there’s no reason your AR team shouldn’t as well)
1) Days Sales Outstanding (DSO)
Your DSO is a measure of how quickly your customers are paying their bills. It’s calculated by dividing your total accounts receivable balance by your average daily sales revenue.
The lower your DSO, the better. A high DSO means you’re not collecting payments as quickly as you could be, and it could be impacting your cash flow.
Tracking your DSO is one of the most common, and most important, metrics for your accounts receivables team.
The formula for calculating days sales outstanding is:
(accounts receivable / total credit sales) * number of days
For example, if you have a total accounts receivable balance of $5,000 in a given month, and your sales revenue in that month is $50,000 - multiplied by the number of days in a month (30), your days sales outstanding for that month is 3.
By tracking your DSO, you can identify any potential issues with your accounts receivables process and take corrective action before they become bigger problems. If your days sales outstanding are high, try implementing accounts receivables management best practices, or an accounts receivable management software like Chaser to reduce them.
2) Operational cost per collection
The operational cost per collection metric looks at the amount of money you’re spending to collect each payment or the cost of getting a single invoice paid. Ideally, this number will be as low as possible so that you’re not losing money on collections efforts.
You can measure this by adding your monthly labour costs (time spent on invoice follow ups multiplied by hourly labour cost), to your monthly outright costs (email provider, tracking and invoicing software, phone fees etc.), and then divide this by the number of invoices paid per month.
This KPI considers your team’s execution and capacity, rather than just your receivables results alone. One of the ways to overcome the inherent cost in collection activities is to invest in accounts receivable automation software. Leveraging the power of automation can help you to improve your accounts receivable performance metrics and keep your collection costs down by automating tasks like payment reminders, customer statements, payment confirmations, and more.
3) Number of revised invoices
If you are regularly needing to revise invoices, it could be an indication that your process is not effective, and may be encountering human errors or system errors in your invoicing process.
The best way to get paid is to make sure your process is as effective as possible, and that you’re collecting the money that’s owed to you. If you’re sending out the wrong invoice to the wrong customer or sending out invoices with mistakes on them, it causes confusion, delays, and means you might have to wait longer to be paid what you are owed.
Tracking the number of revised invoices at your business month over month is one way to measure your accounts receivable performance, and can help you identify areas where you need to improve.
If revised invoices are a problem for your business, you may want to consider moving away from legacy accounting systems or manual accounts receivables processes to help improve efficiency and reduce human and system errors. Instead, consider implementing a cloud accounting system and accounts receivables automation - these systems work together to ensure your data is always up to date and accurate, helping your team to save time and reduce invoicing errors.
Ways to track and communicate your accounts receivable KPIs
When it comes to KPIs, clear communication is key, it’s important that from offset all stakeholders understand and agree the KPIs and how, as well as how often they will be measured and reviewed. Regularly tracking your KPIs can help you make adjustments and stay on track. It’s important to review what is going well (and why) as well as what is not going so well.
There are various ways that you can track your KPIs, and it’s best to find an approach which works well for all stakeholders. Some of the most common ways to track KPIs are either by creating a dashboard which is regularly updated, sharing a weekly report via slack, email or any other tool which you use, or sharing progress during meetings on a weekly or monthly basis.
Whichever approach you take, it’s always important to remember that KPIs are more than just numbers. They are there to guide you to drive your business in the right direction.
Accounts receivables KPIs: the key to improved cash flow
Tracking critical metrics is always a key part of any improvement process, and your accounts receivable performance is no exception.
Putting in place a series of key AR KPIs and connecting them to accounts receivable targets will help you both measure the performance of your receivables department and give you the data you need to improve your overall cash flow.
With cash flow being so important to the survival of businesses, it’s crucial that you take the time to set up and track your accounts receivables KPIs.