Important Metrics to Accounts Receivables Management
Tracking critical metrics is always a key part of any process improvement and the accounts receivable performance is the most vital part of any business.
Putting in place a series of key accounts receivable KPIs and connecting them to our accounts receivable targets will help us to measure both the performance of our receivables department and give us the data we need to improve our overall cash flow.
With cash flow being so important to the survival of businesses, we must take the time to set up and track our accounts receivables KPIs.
Efficient ways to collect dues on time and improve cash flow
DIRECT DEBIT METHOD OF COLLECTING DUES FROM CLIENTS
Direct debits can be a great way to manage finances for businesses, especially for staffing companies. Direct debits are the cheapest method of accepting payments from customers, beating credit and debit cards hands down. This method is scalable, making it affordable for businesses of any size.
Direct debits also help to improve cash flow and reduce the risk of late payments. Having a regular automated payment method with certain standing instruction set-ups between the bank accounts of Clients and our Company will enhances the collection of dues on time without much delays in it.
This simply minimizes the risk of service or cash flow interruption between the two parties.
Automated/Systemized payment reminders to clients
For effective Credit control, enabling methods of scheduled automated reminders to our clients on invoices which is about to due will reduce our outstanding invoices which inturn enhances our cash flow
Efficient ways to enhance the performance of Accounts Receivable Process
Figuring out Accounts receivable days
Accounts Receivable Days (A/R days) is a metric that helps businesses estimate their cash flow. It represents the average time customers take to repay a business for the services rendered, reflecting credit and collection process efficiency .
A lower A/R days value indicates that a company is collecting payments from its customers more quickly, which is a positive sign. On the other hand, a higher A/R days value indicates that a company is taking longer to collect payments, which could be a negative sign .
The formula for calculating “Accounts Receivable days or Debtor Days” is:
= (accounts receivable/total revenue) * number of days
2) Average days delinquent (ADD):
Average days delinquent (ADD) is a metric that lets companies know the average number of days that late payments take to get collected. This isn’t a measure of how long it takes customers to pay their bills, just those that don’t pay within terms (usually 30 days). ADD is also called delinquent days sales outstanding (DSO). DSO is a measurement of how long it takes customers to pay invoices, whether it’s within terms or late, while the ADD focuses on just delinquent payments.
The formula for calculating average days delinquent is:
For example, if our best possible DSO is 30 days, then our 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.
Collection effectiveness Index (CEI) :-
This is the percentage of accounts we turn over, or collect revenue on.
This shows how efficiently our 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.
This also formula based.
4. Turnover Ratio :-
This number shows how quickly you’re collecting revenue from clients (i.e. turning accounts into cash) and indicates your cash flow. Keep this number low. A high ratio means you have a lot of open accounts with uncollected revenue, which should prompt you to revisit your billing and collections processes.
The formula for calculating accounts receivable turnover ratio is:
AR Turnover Ratio = net credit sales/services ÷ average accounts receivable
For example, if we have $25,000,000 in sales/service and $20,000,000 in accounts receivable, our ART would be 25%.
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.
Our 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:
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 means that we are not on a right track of communicating with customers, issuing invoices correctly, or following up on past-due accounts.
Conclusively ,the above KPI metrics needs to be in place with adequate system support to manage expanding customer base for any size of business, which applies to our staffing company too which is under rapid growth.