Accounts receivable (AR) is a critical component of a company's financial operations. It represents the money owed to a company by its customers for goods or services provided on credit. Effectively managing AR is essential for maintaining cash flow and the overall financial health of an organization.
Key Performance Indicators (KPIs) are quantifiable metrics that help evaluate the performance and efficiency of various business processes. In the context of AR, finance teams utilize specific AR KPIs to measure and monitor the effectiveness of their AR management strategies.
In this blog post, we go over 10 accounts receivable KPIs with specific examples and how to calculate them. Let’s begin.
What are accounts receivable KPIs?
Accounts receivable KPIs (Key Performance Indicators) are performance metrics that companies use to monitor the efficiency and effectiveness of their cash collection process. These metrics provide valuable insights into how fast and efficiently a company can convert credit sales into real cash, which is crucial for maintaining a healthy cash flow and financial stability.
What is accounts receivable tracking?
Accounts receivable tracking is the process of monitoring how much cash flow is tied up in unpaid customer invoices. Typically, finance professionals do this manually using spreadsheets, accounting software, or a combination of both. By monitoring key performance indicators (KPIs), businesses can gain insights into their accounts receivable performance and identify potential bottlenecks.
Benefits of monitoring AR KPIs
Your AR team must monitor AR KPIs for several key reasons:
Improved Cash Flow
- Faster Collections: Monitoring KPIs like DSO reveals areas for improvement in the collection process, ultimately leading to faster collections and improved cash flow. This avoids cash flow bottlenecks and enables timely payments for expenses and investments.
- Reduced Operating Costs: Early identification and resolution of issues like payment delays or disputes lowers the cost of chasing late payments and minimizes bad debt write-offs.
- Informed Credit Decisions: Tracking KPIs like the Bad Debt to Sales Ratio helps assess credit risk and make informed decisions about who to extend credit to, further reducing potential bad debt losses.
Enhanced Financial Visibility
- Data-Driven Insights: Regular monitoring of KPIs provides a clear picture of AR performance, highlighting strengths and weaknesses in the process. This data-driven approach enables informed decision-making and strategic planning for optimizing AR and overall financial health.
- Performance Benchmarking: Comparing your KPIs to industry standards or previous performance goals helps track progress and identify areas for improvement. This allows you to measure your AR team's effectiveness and set achievable goals for further optimization.
Stronger Customer Relationships
- Reduced Disputes: Efficiently resolving billing errors and invoice discrepancies identified through KPIs like revised invoices can improve customer satisfaction and reduce disputes. This strengthens customer relationships and promotes repeat business.
- Faster Resolution of Payment Issues: Identifying and addressing late payments through KPI monitoring allows for proactive communication and swift resolution of payment issues, minimizing customer friction.
How do finance teams monitor AR KPIs in a real day?
Finance teams use advanced technologies to monitor and measure AR KPIs. They leverage finance observability tools that provide real-time updates on AR metrics, enabling them to track performance and make timely decisions. This real-time visibility into AR KPIs allows finance teams to address issues promptly, optimize collection processes, and ensure a healthy cash flow.
Finance observability platforms also play a crucial role in the management of AR KPIs. These tools help finance teams analyze trends, patterns, and correlations within AR data, enabling them to identify opportunities for improvement and implement effective strategies.
Bucketing accounts receivables KPIs
The categorization of accounts receivable (AR) KPIs into efficiency, effectiveness, customer satisfaction, and operational buckets reflects their focus on different aspects of AR performance.
Here's a breakdown of why each KPI falls into its designated category:
Efficiency KPIs
Efficiency KPIs measure how quickly and cost-effectively AR tasks are completed. They focus on reducing the time it takes to collect payments and minimizing operational costs associated with the AR process. Lower DSO, ADD, and operational costs per collection indicate greater efficiency in processing invoices and collecting payments.
Effectiveness KPIs
Effectiveness KPIs gauge the success of the AR function in achieving its primary objective of collecting outstanding payments. They assess the percentage of payments collected within target periods, the level of credit risk among customers, and the amount of revenue lost to bad debt. Higher CEI, lower bad debt ratio, and a lower percentage of high-risk accounts demonstrate effective credit control and successful collection efforts.
Customer Satisfaction KPIs
Customer Satisfaction KPIs evaluate the customer's experience with the AR process. They track the responsiveness of the AR team to inquiries, the accuracy of billing, and the convenience of available payment methods. Faster response times, fewer invoice revisions, and a diverse payment mix contribute to a positive customer experience and potentially faster payments.
Operational KPIs
Operational KPIs focus on the internal functioning of the AR team and department. They track team productivity, adherence to credit policies, and employee turnover within the AR function. Higher staff productivity, consistent policy enforcement, and lower turnover contribute to a smooth-running AR operation and improved performance.
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10 Most Important AR KPIs to Track
By keeping a close eye on the AR KPIs, the AR team can gather information, pinpoint any issues that may arise, and improve its performance to enhance cash flow, risk management, efficiency, and customer satisfaction.
KPI 1: Days Sales Outstanding (DSO)
DSO can be defined as the average number of days it takes to collect payment on outstanding invoices. It helps in measuring collection efficiency and cash flow health. Usually, a lower DSO is better.
For example, a DSO of 30 means it takes an average of 30 days to collect payments.
DSO = (Average Accounts Receivable / Total Credit Sales) * Days in Period
KPI 2: Accounts Receivable Turnover Ratio
AR turnover ratio is the number of times AR is collected and replaced. It reflects how quickly receivables are converted into cash. Usually, a higher turnover is better.
For example, a turnover ratio of 12 means AR is collected and replaced 12 times a year.
AR turnover ratio = Total Credit Sales / Average Accounts Receivable
KPI 3: Average Days Delinquent (ADD)
ADD can be defined as the average number of days invoices are past due. It highlights potential collection problems and bad debts. For example, an ADD of 15 means invoices are typically 15 days overdue.
ADD = DSO - Best Possible Days Outstanding
KPI 4: Collections Effectiveness Index (CEI)
CEI can be defined as the percentage of AR collected within a specific period. It helps in measuring collection effort effectiveness. For example, a CEI of 90% means 90% of AR was collected in the period.
CEI = [(Beginning Receivables + Credit Sales - Ending Receivables) / (Beginning Receivables + Credit Sales - Ending Current Receivables)] * 100
KPI 5: Bad Debt to Sales Ratio
Bad debt to sales ratio is the percentage of credit sales ultimately uncollectible. It helps in tracking financial losses due to bad debts. For example, a 2% ratio means 2% of credit sales are written off as bad debt.
Bad debt to sales ratio = Uncollectible Receivables / Total Sales
KPI 6: Percentage of High-Risk Accounts
The percentage of high-risk accounts is the proportion of AR considered high-risk for default. It helps in identifying potential collection issues for proactive strategies. For example, a 10% ratio means 10% of AR is deemed high risk.
Percentage of high-risk accounts = (High-Risk Account Receivable Balance / Total AR Balance) * 100
KPI 7: Number of Revised Invoices
The number of revised invoices is the frequency of invoices needing correction or amendment. It helps in indicating potential errors in billing or order fulfillment processes. For example, 5% of invoices being revised suggests process issues.
Number of revised invoices = Total Number of Revised Invoices Issued / Invoices Issued
KPI 8: Staff Productivity
Staff productivity is the amount of AR collected per AR team member in a period. It helps in measuring team efficiency and workload. For example, $500,000 is collected per team member per month.
Staff productivity = (Total Amount Collected / Number of AR Team Members) / Period
KPI 9: Operational Cost Per Collection
Operational cost per collection is the average cost to collect one dollar of AR. It helps in tracking the cost-effectiveness of collection efforts. For example, $0.10 cost to collect $1 means a 10% collection cost.
Operational cost per collection = Total AR Operating Expenses / Total Amount Collected
KPI 10: Customer Satisfaction (CSAT) Score from AR Interactions
CSAT from AR interactions is the measure of customer satisfaction with AR processes. It evaluates customer experience and identifies areas for improvement. For example, a score of 85% indicates generally positive customer satisfaction.
CSAT from AR interactions = Measured through surveys or feedback tools
Measure AR KPIs with Bluecopa
Bluecopa takes the hassle out of tracking and analyzing AR KPIs. Here's how it simplifies the process:
Automated data collection and integration
Bluecopa automatically pulls data from your existing accounting and ERP systems, eliminating manual data entry and saving time. It provides real-time access to accurate and up-to-date AR data, ensuring you always have the latest insights.
Pre-built dashboards and reports
Bluecopa eliminates the need for complex spreadsheet formulas and report creation. It offers pre-built dashboards and reports that present your key AR KPIs in a clear and visually appealing format. You can drill down into specific metrics and analyze trends over time, helping you identify areas for improvement.
Customizable alerts and notifications
Bluecopa sets up automatic alerts and notifications based on your defined thresholds for critical AR KPIs. This allows you to proactively address potential issues, like overdue invoices or high bad debt risk before they escalate. You can configure alerts to notify specific team members or trigger workflow actions for immediate follow-up.
Get a personalized demo if you’re interested in tracking AR metrics continuously and benefiting your AR teams.
