Essential Accounts Receivable KPIs to Keep Track of Pt. 1
Accounts Receivable (AR) KPIs are a set of metrics used to measure the effectiveness of a company’s accounts receivable processes.
They are used to track the performance of a company’s customers in their ability to pay their invoices on time and to measure the efficiency of the company’s internal accounts receivable processes. AR KPIs are a critical component in the financial success of any business, as they provide insight into the company’s ability to collect payments from its customers.
In today’s article, let’s explore the various metrics used to gain insight into a company’s accounts receivable performance. Here’s what you need to know:
Three Most Common AR KPIs
Days Sales Outstanding (DSO)
Days Sales Outstanding (DSO) is a financial metric used to measure the average number of days it takes a company to collect payments from customers after the sale of a product or service has been completed. The metric is important because it helps businesses determine the liquidity of their accounts receivable.
The DSO ratio is calculated by taking the total amount of outstanding receivables for a period and dividing it by the total credit sales for the same period. The result is then multiplied by the number of days in that period; this gives the average number of days it takes for customers to pay. The lower the DSO ratio, the better, as it indicates that the company is collecting payments from customers in a timely manner.
DSO is a useful metric for businesses to monitor the effectiveness of their accounts receivable management. It gives them an idea of how quickly they can collect payments from customers, contributing to their overall financial health.
It can also be used to identify areas of improvement; for example, if the DSO ratio is too high, it may indicate that the company needs to review its credit terms and collection processes.
Average Days Delinquent (ADD)
Average Days Delinquent (ADD) is a measure used by companies to track how long customers take to pay their invoices. It is an essential indicator of the overall health of an organization’s accounts receivable and can help provide insight into the effectiveness of its collections strategies.
ADD is calculated by taking the total days since a customer’s scheduled payment was due and dividing it by the total number of delinquent payments. This number is then multiplied by 100 to convert it to a percentage.
For example, if a customer has been delinquent for 15 days, and three total payments have been delinquent, ADD would be (15/3) x 100 = 500%.
Bad Debt Ratio
The Bad Debt Ratio, also known as the Allowance for Doubtful Accounts, is one of the key performance indicators (KPIs) used to measure the effectiveness of a company’s receivables management.
It is a ratio that compares the amount of money a company has written off as bad debt to the total amount of credit sales or receivables. A high bad debt ratio indicates that a company is having difficulty collecting its accounts receivable and is potentially underperforming in its management of receivables.
The bad debt ratio is calculated by taking the total amount of bad debt written off in a given period of time, such as a quarter or a year, and dividing it by the total amount of credit sales or receivables for the same period. The ratio is usually expressed as a percentage.
This metric is a valuable tool for companies to assess their receivables management performance and identify areas of improvement. A high bad debt ratio may indicate that a company needs to have adequate credit policies or be adequately collecting on its accounts receivable. It can also signal that a company is not properly evaluating its customers’ creditworthiness before extending credit.
The Bottom Line
Keeping track of your AR KPIs is essential to your business’s success. It allows you to understand your financial health, identify areas of improvement, and take the necessary steps to ensure your business’s financial success. It is important to remember that your AR KPI tracking should be ongoing and should be updated regularly in order to ensure that your business is always on track.
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