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40 politely-worded templates to get invoices paid

10 accounts receivables KPIs you should be tracking | Chaser

10 accounts receivables KPIs you should be tracking | Chaser

In an increasingly data-driven business landscape, tracking the right KPIs for your accounts receivable team's performance is an essential assignment that will ultimately influence your bottom line.

Understanding that you need to track accounts receivable KPIs is one thing, but knowing which key performance indicators will actively support your business is another. This guide will discuss 10 easy-to-implement and measurable KPIs to track your team's performance, along with 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 for sustained financial health.

What are accounts receivables KPIs?

Accounts receivables key performance metrics, or KPIs are performance metrics used to track the success of your accounts receivable team or process. Firstly, accounts receivable is defined as the money owed to a company, for the products or services it has provided, that have not yet been paid.

Tracking key 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)

If the company offers credit sales to its B2B or B2C clients, measuring accounts receivable performance levels will ultimately protect the company's cash flow while simultaneously promoting more accurate financial forecasting relating to the company's AR turnover ratio.

What does a strong accounts receivable performance look like?

Before looking at different accounts receivable KPIs, you must ask what indicates a strong AR performance. The individual key metrics will provide further insight into the team's performance. However, general objectives should include;

  • Gaining fast cash collections, not least because accounts receivables are considered a current asset and should be collected quickly.
  • Achieving optimised financial returns, which is characterised by minimal bad debts and write offs.
  • Ensuring good communication, the key to resolving disputes, between the AR team and all relevant credit clients.

A strong AR performance will boost your bottom line, cash flow, and time management. Tracking the right accounts receivable KPIs will lead you to the desired results.


10 must-track accounts receivable KPIs

There is a long list of potential accounts receivable KPIs to consider but some are naturally far more significant than others.

The best KPIs relating to receivable processes should reduce late payments and invoice disputes while additionally combatting issues linked to high risk customers and high risk accounts. Crucially, they must provide accurate data that can help you reduce the operational cost per collection.

The top 10 most important accounts receivable KPIs are detailed below, along with the necessary information on how to calculate them as well as what the results of those calculations mean to the performance of your AR team.


1) Days Sales Outstanding (DSO)

Your days sales outstanding DSO, or DSO for short, 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 days sales outstanding 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:

The formula for calculating days sales outstanding

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

Also known as ‘
accounts receivable days', or ‘debtor days' this formula will tell you how many days it takes, on average, from the time a sale is made to when the cash from that sale is received.

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 to reduce them.


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2) Average days delinquent

The average days delinquent is an accounts receivables KPI that shows you the average number of days a customer takes to pay their invoice after it's due.

This metric is important because it can help you predict when bad debts may become an issue. Failure to track this accounts receivable KPI enables high risk accounts to damage your financial health because bad debt and delayed payments will be unforeseen.

Conversely, tracking this KPI improves the accounts receivable processes as you will have a far better understanding of how long it will be before high risk accounts settle their overdue payments.

You can calculate this metric by dividing your total past-due accounts receivable balance by your total accounts receivable balance.

The formula for
calculating average days delinquent is:

The formula for calculating average days delinquent

ADD = regular DSO - best possible DSO

For example, if your best possible DSO is 30 days, then your regular DSO is 50 days, you have an average days delinquent of 20 days

This means that on average, it takes customers 20 days to pay their invoices after they are due. When it comes to monitoring your AR team, your average days delinquent should be one of the key metrics you focus on as it shows how efficiently your team is collecting payments.

If your accounts receivables team are having trouble with recovering invoices past their due date, ensure they are conducting effective accounts receivables phone calls before writing invoices off or escalating them to debt collections. 

3) Accounts receivable turnover ratio (ART)

Your accounts receivable turnover ratio shows how quickly your AR department is collecting payments and turning that money into cash. You can calculate it by dividing net sales by average accounts receivable.

The formula for calculating accounts receivable turnover ratio is:

The formula for calculating accounts receivable turnover ratio

ART = net credit sales ÷ average accounts receivable

For example, if you have $25,000,000 in sales and $20,000,000 in accounts receivable, your ART would be 25%.

A high turnover rate is good as it means you're collecting payments quickly, but a low turnover rate could indicate that your AR team is not doing enough to collect on payments. If you need to speed up customer payments to improve your accounts receivable turnover ratio, try incentivising customers to make invoice payments earlier with early payment discounts.

4) Collections effectiveness index (CEI)

The collections effectiveness index, or collections effectiveness index CEI, shows how efficiently your company is collecting payments. It is one of the most important accounts receivable KPIs because it directly correlates to how much money is lost to bad debts.

To calculate the collection effectiveness index rate, divide the number of delinquent accounts by the total number of active accounts receivable.

The formula for calculating your collections effectiveness index is:

The formula for calculating your collections effectiveness index

For example, if your company has a beginning A/R of $100,000, monthly credit sales of $200,000 and ending total A/R of $120,000, the collections effectiveness index would be calculated as:

CEI = ($100,000 + 200,000 – 120,000) ÷ (100,000 + 200.000 – 120,000) x 100

The higher the collections effectiveness index, the less effective your collections team is at getting money from customers. This could be due to a lack of communication with customers, incorrect invoicing, or simply not following up on past-due accounts.

If your team is struggling with collections effectiveness, as highlighted by the collection effectiveness index, you may need to improve your invoice tracking process to stop customer payments from slipping through the cracks.

Either implement manual invoice tracking with this free invoice tracking spreadsheet, or use an automated accounts receivables system to keep on top of invoices.  


5) Bad debt to sales ratio

The bad debt to sales ratio is another important metric to track. This measures the percentage of credit sales that go uncollected, also known as bad debt or bad debts.

Unfortunately, bad debts are a danger that comes with the territory of extending credit. However, your AR team must look to minimise the bad debt to sales ratio, which will ensure a greater percentage of your outstanding invoices will be paid.

Therefore, it is one of the most vital accounts receivable KPIs. To calculate it, divide your company's total bad debts by its total sales.

The formula for calculating the bad debt to sales ratio is:

The formula for calculating the bad debt to sales ratio

For example, if your company has a total bad debt of $20,000 and total sales of $100,000, your bad debt to sales ratio would be 20%.

A good bad debt to sales ratio would generally be considered to be below 15% while a poor bad debts to sales ratio would be anything above 25%.

A high bad debt to sales ratio could mean that you're not doing a good job of communicating with customers, issuing invoices correctly, or following up on past-due accounts. It can also suggest that your company is growing too quickly and may not have adequate systems in place to manage its expanding customer base.

If your accounts receivables team are struggling to get through to customers, try using these 6 templates to politely ask for invoice payments. Taking a diplomatic, polite approach whilst creating a sense of urgency can help you get through to customers and reduce bad debts.

If it is unclear whether your team are following up on past-due accounts, you must implement tracking, either using a manual invoice tracking spreadsheet, or through an automated receivables system with an inbuilt receivables CRM functionality.



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6) Write-off ratio

Your write off ratio is the percentage of accounts receivable that you actually write off as bad debt. This figure can help you identify whether or not your collection efforts are effective.

Writing off bad debts is an inevitable part of business, but it is an issue that significantly reduces the profit margins predicted from your net credit sales. It is one of the key metrics for your AR team to track because failure to collect payments from high risk customers will limit growth opportunities and could potentially lead to the company's closure.

The formula for calculating your write-off ratio is:

The formula for calculating your write off ratio

So, for example, if you had a bad debt expense of $100 and an accounts receivable balance of $1000, your write-off ratio would be:

($100 / $1000) x 100 = 10%

Ideally, you want to keep your write-off ratio as low as possible. However, there will always be some amount of bad debt that's unavoidable.

The key is to make sure that the ratio doesn't get too high, you need better accounts receivables management or that you are taking on clients who are likely to default on their payments. To protect yourself from bad payers, consider implementing credit checks as standard practice when onboarding new clients. If your team frequently writes invoices off as bad debt, try these 5 ways to avoid writing off bad debts to reduce your write off ratio and boost your cash collections.


7) Right party contracted (RPC) rate

Your right party contact rate is simply the percentage of contact attempts (emails, phone calls, SMS reminders) that were made to a valid contact method for the person or business from whom an invoice is due (or a “right party”)

For example, if you send 100 payment reminder emails and 95 of them went to the correct contact for payment, your RPC would be 95%.

A high RPC rate is good, as it means that you're sending most of your payment communications to the people who are responsible for payment. Once you are through to the right contact, the collections process should become far smoother.

If your RPC rate is low, however, it could mean that you're not doing a good job of targeting your efforts towards the right people or you aren't collecting the right information on accounts payable during the onboarding process. This issue may surface whether you use manual data entry or automated data entry processes.

If you are struggling to collect contact information for the right party to contact, try setting out guidelines for this in your accounts receivables or credit control policy. It allows staff members to follow set processes to get the right party's accurate information.


8) Operational cost per collection

The operational cost per collection metric looks at the amount of money you're spending to collect each payment.

This includes the cost of employee time, postage, and other expenses related to getting payments from customers.

Ideally, this number will be as low as possible so that you're not losing money on collections efforts. One of the ways to overcome the inherent cost of 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.

9) Deduction days outstanding (DDO)

Working out your deduction days outstanding metric will give you an idea of how quickly you're collecting payments from customers.

Given that time is money, keeping this figure low shows that your operational cost linked to payment collections is manageable. The DDO number is calculated by dividing the total number of days that invoices have been outstanding by the average number of invoices per day.

The formula for working out your DDO is:

The formula for working out your DDO

This will give you the total number of days in a year that it would take to collect all payments from customers.

You can use this metric to benchmark how your accounts receivable department is performing and identify any areas for improvement.

There are a number of factors that can contribute to high DDO, such as slow invoice payment processing, poor credit management, or even just a lot of customer debt.

If this figure is high, it means that you're taking a long time to get paid, which can impact your cash flow and profitability - even if net credit sales figures are high. If this is an issue for your business, try following these 7 steps to get paid on time.

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10) 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. This could mean that the credit terms are wrong or that the invoice does not reflect the service offered.

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. Worse still, it can damage customer relations, which may harm future monthly net credit sales.

Tracking the number of revised invoices at your business month over month is one way to measure your accounts receivable performance. It can help you identify areas where you need to improve and subsequently support your AR team with future cash collections.

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.

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 accounts receivable 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, you must take the time to set up and track your accounts receivables KPIs.

Help your team exceed their KPIs whilst saving time with end-to-end accounts receivables automation. To do this, implement Chaser to deal with the repetitive, day-to-day tasks so that your team is free to speak with customers over the phone, resolve disputes, and focus on more important tasks. Try accounts receivables software for free, for 14 days.

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