COVID-19 brought a lot of changes in almost every field. These last few years proved to be quite difficult for Accounts Receivable. Hundreds and thousands, even millions of businesses, were forced to divert their attention back to the importance of cash because it became necessary for their survival. Although difficult, this increased the focus on cash, which has put Accounts Receivable in the spotlight once more.
You, as an owner of a business or a company, may be wondering if you are tracking the most accurate and the best KPIs for your accounts receivable team. This blog post will explain what accounts receivable KPIs are and will also discuss the most important and commonly used KPIs.
But before we jump onto the examples, let’s talk about the basics first.
What are Key Performance Indicators (KPIs)?
Key Performance Indicators or KPIs are defined as the quantifiable measuring tools used by businesses with the purpose to optimize their performance. These KPIs can increase their efficiency and gauge their performances in day-to-day operations. Moreover, these KPIs can also help you identify all those areas where improvement is required.
Benefits of Key Performance Indicators for Businesses
Key Performance Indicators (KPIs) are a way to measure the success of a company and its employees. It helps determine if the business is running according to its objectives or not.
You may have heard about KPIs before, but if not, here’s what they are:
– Key Performance Indicators are metrics that measure how successful an organization is at accomplishing its goals.
– KPIs can be used to track how well an organization is performing against specific goals or objectives.
– KPIs can be used as a tool for measuring employee performance and satisfaction so that managers can make sure they’re addressing any issues before they become more serious problems.
What are Accounts Receivable KPIs?
Accounts receivables KPIs are quantifiable performance measuring tools employed to monitor the success and overall performance of your accounts receivable team and the process.
Tracking Accounts Receivable KPIs is essential for figuring out and improving the company’s accounts receivables process and cash flow better. By gauging these KPIs, you will be able to
- Estimate the rate at which clients pay their bills.
- Specify the areas which are problematic and have issues with customer payments
- Assess the effectiveness of your accounts receivable process and the productivity of your team
- Help your accounts receivables team mark the areas where issues are present and make improvements in those areas.
By tracking these accounts receivable performance KPIs, you can determine the areas where further improvement is required. It also enables you to make data-driven decisions about how to improve your accounts receivable process and results.
Examples of Accounts Receivable KPIs
To help you get started, we’ll be covering 5 of the most important and common accounts receivable KPIs used by organizations.
Days Sales Outstanding (DSO)
Days sales outstanding (DSO) is an account receivable KPI used to assess how quickly your clients are paying their bills. You can calculate Days Sales Outstanding (DSO) by dividing the total account receivable balance by the number of average daily sales revenue.
If the value of your DSO is higher, it means that you are not collecting the payments as quickly as you are supposed to. Your slow pace can leave many tasks incomplete and decrease. your productivity as well. However, the lower the value of DSO is, the better.
Monitoring of DSO can help you determine what issues might exist in your company. Identifying such errors is essential because this way, you can take corrective action for those issues and increase your overall productivity.
Average days delinquent
This accounts receivable KPI specifies the average number of days or time taken by a client to pay his invoice after the due date. This KPI is important for business because this way, you can predict when bad debt or a huge debt may become a problem for you or your organization because it can help you predict when a bad debt may become an issue.
To calculate this KPI, you need to divide the total past-due accounts receivable balance by the total accounts receivable balance.
Accounts receivable turnover ratio (ART)
The accounts receivable turnover ratio (ARY) is another very useful yet commonly used accounts receivable KPI. This KPI shows the pace with which your AR department is collecting the payments and turning that digital money into cash. You can calculate the Accounts receivable turnover ratio.
A higher value of accounts receivable turnover ratio means that you’re collecting revenues fast, which is beneficial for the company, whereas a low turnover rate could imply that your AR team is not working as efficiently as it should and is not doing well enough to collect payments.
Collections effectiveness index (CEI)
The collections effectiveness index or CEI is another very important KPI used in the accounts receivable department. This metric tells you about how efficiently your organization is collecting the due payments.
If you wish to calculate it, you need to divide the total number of delinquent accounts by the total number of active accounts receivable and you get the value of the Collections Effectiveness index.
A higher value of CEI shows that your collection team is not that efficient in collecting the payments from the customers. There could be many reasons for this. Lack of proper communication with the customers, wrong entry of the data, and inability to follow up on past-due accounts are a few of them.
Operational cost per collection
This key performance indicator is used to get an insight into the amount of money that you and your company are spending to collect payment from the customers within a period. Ideally, the value of this metric should be as low as possible because a low value of operational cost per collection shows that you are not losing any amount on the collection efforts and you get all the amounts effortlessly. This shows the efficiency and productivity of your accounts receivable department and the entire team.
To calculate the value of operational cost per collection, you can add your monthly labor costs to your monthly outright costs and then divide the answer by the number of invoices paid per month. This gives you the final value of the operational cost per collection.
Accounts receivables KPIs: the key to improved cash flow
Every business needs a tracking tool to keep a record of the productivity and efficiency of your company. If you wish to know if your organization is on the right path and will be able to achieve your business goals or not, you need to incorporate key performance indicators in your business.
Critical metrics need to be tracked because these are a key part of any improvement process. You can recognize the areas of the business that need further improvement. Improvements are necessary for your company to adapt to any of the changes made following the trends of the industry.
Cash flow has recently become an essential part of the survival of businesses. A lot has changed in the last few years. Companies have started focusing on the importance of cash. Hence it is crucial to take time to set up and track your accounts receivable KPIs if you want to keep pace with the developing industry.
How Can You Make Sure That Your Company Tracks Accounts Receivable KPIs?
When you introduce any sort of KPI into your business, you might face a few challenges with many different projects. Not everyone in your company or business may know what accounts receivable KPIs are, how to use them, and what benefits they provide to your company.
For this purpose, it is your job to ensure that everyone on your team is on the same page. You need to make sure that everyone knows what accounts receivable KPIs are.
If you wish to enlighten your accounts receivable department with the KPIs, arrange some educational and training sessions for your team to help them understand the basic concept and why KPIs are important for your business to move ahead in this field, and how these KPIs, when used efficiently, can increase the overall productivity of your company.
How To Select The Right Accounts Receivable KPIs?
When selecting the right Accounts receivable KPIs for your company, you need to keep a few things in your mind. Keeping these points in your mind, you can select the best KPIs out there for your company that could be easy to understand and implement in your company. Therefore, you must focus on these points while making a selection of KPIs:
- Relevance:
Choose the accounts receivable KPIs that are pertinent to your customer’s journey and the goals of your business.
- Measurability:
Ensure that the KPIs you choose can be accurately measured and tracked.
- Actionability:
Pick KPIs that can be acted upon, and that drive positive changes in the customer experience.
- Alignment with business goals:
Make sure that the KPIs align with the overall goals of the business.
- Customer-centricity:
Select and prefer those KPIs that are focused on the customer, suppliers, dealers etc.
- Trending:
Select KPIs that can be tracked over time, to understand trends and identify areas wherever more improvement is required.
How Can Microsoft Dynamics 365 Help With Accounts Receivable KPIs?
Microsoft Dynamics 365 has always offered immense opportunities for businesses to optimize their overall performance.
And just like that, it can offer tremendous advantages to corporations when it comes to tracking accounts receivable KPIs. By incorporating the various elements of Dynamics 365, such as the financials module, companies can smoothly and precisely accumulate and examine their accounts receivable data.
With the help of Dynamics 365, companies can quickly determine any areas of improvement in their accounts receivable processes and make essential changes to facilitate the entire process.
Additionally, Dynamics 365 offers real-time visibility into accounts receivable performance. This can help businesses make precise and instructed decisions.
Lastly, companies can use the effective analytics and reporting capabilities of Dynamics 365 to further refine their accounts receivable processes.
FAQs
What are Key Performance Indicators?
Key Performance Indicators are estimates used to assess the performance of a business. KPIs can be quantitative or qualitative and are targets that can help you estimate your overall progress against your most strategic objectives.
Why are key performance indicators so important?
KPIs are important because they help you understand where you as an organization stand. It helps you set goals and gives you a deep insight into if you are making progress or not, if you are achieving your goals or not, and if you’re headed in the direction you want.
