Measuring the success of your accounts receivable goes beyond the bottom line. The way in which your business manages such an important element and the working capital it is able to generate typically comes down to a few key performance indicators. These indicators will often identify the efficient of your accounts receivable operations. While businesses continue to evolve and innovate, these functions have expanded in scope. Failing to adhere to these key performance indicators could be detrimental to your business.
Considering this, below you’ll find a number of the most important performance indicators that reflect on your organization’s accounts receivables:
- Days Sales Outstanding: this indicator is all about how long it takes to receive payments compared to the original date of an invoice. In almost all instances, you want this number to be as close as it can to your average terms of sale. The sooner you receive payment, the better. This indicator can be challenging to track in the case of seasonal businesses, however. When necessary, avoid annual averages in these cases.
- Average Days Delinquent: this indicator details the aggregate number of days in which payments are overdue. If you’re spending too much time waiting for payments, perhaps it might be time to look at revamping your collections and invoice processing systems.
- Accounts Receivable Turnover Ratio: This ratio comes from dividing your net credit sales by your average accounts receivable balance. The result is a measure of how effectively your business collects revenue. The higher the result of this quotient, the quicker your business is able to convert its accounts receivable balance into available cash, and thus more liquidity.
- Number of Invoicing Disputes: this indicator is meant to provide insight regarding the number of invoices that need some sort of revision or credit issued as a result of billing or processing errors. A high number of these disputes would indicate a systematic issue that requires prompt attention, in most cases that’d be your organization’s billing procedures.
- Bad Debts to Sales Ratio: this indicator is meant to provide insight regarding bad debts with respect to received revenues. Comparing credit losses against your businesses’ sales from credit risk policies or sales lost as a result of restrictive corporate credit policies.
- Percentage of High-Risk Accounts: this indicator is meant to identify high risk accounts and customers that might require a unique credit or pricing strategy to justify the involvement. Avoiding high-risk clients isn’t always possible but remaining safe throughout the work is.
Perspective is Imperative
Monitoring these key performance indicators allows organizations to become aware of threatening issues prior to them disrupting operations. It’s crucial that your organization’s accounts receivable department remains diligent on tracking this data. If they aren’t, it might be time to consider an accounts receivable automation solution that can simplify this tracking to provide all the necessary insight you need.