5 Key Accounts Receivable KPIs for an Optimized O2C Process
Author: Vanessa Straub, Marketing - North American Go To Market of PAF
The last year has been packed with obstacles, as the global pandemic continues and regions across the world face economic difficulties. For many businesses, this poses a challenge because your Accounts Receivable department is pushing to collect more cash from a customer who is less willing to pay. As we move into 2021, businesses are focusing more and more on recovery – which means AR teams and collections teams should be performing at maximum capacity and efficiency.
Here are 5 important KPI’s that your AR team should be aware of
1 – Average Days Delinquent (ADD)
Average Days Delinquent allows you to capture a look at your overall collections performance. This makes ADD a valuable KPI when you want a quick and reliable view of how their team is executing, due largely to the fact that it is easy to calculate and the reliable data inputs involved. All that this KPI is concerned with is the due date of a receivable (usually captured reliably in contracts and invoices), and the paid date of that receivable (reliably captured at the point of payment).
At the most basic level, ADD offers a valuable, high-level view of collections performance, all while requiring very little of you. You do not have to dig through your data, there is a very low chance for inaccuracy or bias, and the calculations it relies on are very straight forward.
2 – Days Sales Outstanding (DSO)
Days Sales Outstanding, or DSO, is the most commonly tracked KPI for Accounts Receivable. By determining the average number of days it takes to collect payments, you can keep an eye on cash flow – at an individual customer and organizational level.
Because it helps to identify customers who frequently push up your ratio, DSO can start to highlight some next steps and priorities for enhancing collections execution. It allows you to understand where the issues on the customer side might have originated. Finally, DSO can help you learn how different market forces influence payment times, allowing you to be proactive and adapt your strategy.
Generally, a low average DSO is better for maximizing cash flow. Very low DSO is not typical for most industries; only in those where payment terms and collection effectiveness are twin levers.
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3 – Percentage of Current A/R
The issue surrounding DSO is that it doesn’t consider receivables before they’re due. It only considers receivables that have already become a problem. This means it can’t do much to help your collections team work proactively, which is where Percentage of Current A/R comes in.
Percentage of Current A/R helps you better understand the relative distribution of current and overdue receivables. This can help your team become more proactive about high-values receivables that are almost due, because it does not only look at payments that are late.
This KPI is helping to drive real transformations in your AR departments. It supports the idea that teams should work proactively to execute at maximum capacity and deliver the best results. This begins by focusing on age, risk, and value of the receivable – not just the oldest receivable. That way, teams spend less time on delinquent payments that may never come, and instead, recover more cash at a quicker rate.
4 – Collections Effectiveness Index (CEI)
Understanding the execution gaps in your collection processes is vital when maintaining tight control over your cash, as you need to be able to eliminate them. However, it can be difficult to determine where your team has been acting ineffectively. With KPIs such as DSO, you are provided with an overall sense of your cash flow health rather than a complete and reliable picture. However, your Collections Effectiveness Index (CEI) specifically measures the effectiveness of your collections department at securing overdue payments within a given time frame. By calculating the percentage of collected payments against available receivables, you can see whether or not you might have a problem. Process Mining or EMS can then be used to further identify where execution gaps might lie. Ideally, this number should be above 80% – with the best A/R departments out there reaching 83% CEI. If it drops lower, that is a clear indication that something is hindering your execution capacity — whether it may be your customer’s health, how you are targeting specific accounts, or your team efficiency. As your organization and A/R department evolves, keeping track of this metric frequently and over shorter time periods provides you with insights into gaps in your processes, as they occur.
5 – Operational Cost per Collection
For many businesses, COVID recovery efforts will naturally focus on strategic short-term goals and improvements, which are the kinds of changes that keep them stable and operational. But during times of change, it’s also important to consider how current decisions could support long-term efficiency gains. Being proactive like this can help your company overcome adversity.
Monitoring Operational Cost Per Collection can be incredibly valuable for supporting long-term improvement and optimization of collections. This is one of very few KPIs that looks beyond receivables alone and considers how your team’s execution capacity (as well as the processes surrounding them) could be maximized to deliver more collections at a lower cost. Tracking this KPI likely will not help you find quick fixes, nor is it likely to help you understand how your performance compares to that of your competitors. Building a reliable view of your cost per collection based on accurate data (which is unbiased) is a difficult task to achieve, however, easily achievable with the correct technology. But, when this KPI is tracked accurately, it can support significant changes and improvements across your A/R department.
An increasing amount of A/R teams are realizing that there’s only so much they can do to drive collections using the methods and metrics they have in place today. To change this trend, your team must become more proactive and look inward for chances to improve efficiency, by maximizing your departments capacity to execute. Operational Cost per Collection is a great tool for those teams who want to deliver internal optimizations and more.
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