Tracking each collection's operational costs is valuable in assisting long-term collection optimization and improvement.
Fremont, CA: A company's operational effectiveness, risk management, financial stability, and strategic planning all depend on tracking its accounts receivable. Maintaining a sustainable, growth-oriented financial and operational climate is just as important as ensuring that sales are turned into cash.
You should track these KPIs to gain a more complete view of A/R performance and better understand where and how your team can perform better.
Average Days Delinquent (ADD)
Average Days Delinquent (ADD) is a valuable indicator for anyone who wants to quickly and reliably see how their team is performing at a glance. It gives a good overview of the performance of your entire collection.
This is primarily due to the KPI's ease of calculation and the dependability and accessibility of its data inputs. ADD only cares about a receivable's due date, typically accurately recorded in contracts and invoices, and its paid date, which is accurately recorded at the time of payment.
At its most basic level, ADD requires very little of you or your team and provides a practical, high-level view of collections performance. The computation behind it is straightforward; there is no need to perform a deep dive into the data, and there is very little room for bias or inaccuracy to seep in.
Days Sales Outstanding (DSO)
For good reason, DSO is the most often monitored KPI for accounts receivable. Finding the typical time it takes to collect payments will allow you to monitor cash flow for specific customers and the entire company.
DSO begins to establish some fundamental next steps and goals for increasing collections by assisting in identifying issue payers and the customers responsible for causing your ratio to rise. At a basic level, it helps you identify potential customer-side problem sources. DSO fluctuations can even assist you in understanding how various market variables impact payment schedules, allowing you to appropriately modify your accounts receivable approach.
Percentage of Current Accounts Receivable
Receivables should be considered before they are due, which is the main issue with DSO. It concerns only problematic receivables. Consequently, it cannot support the proactive work of your collections team. That's where the current A/R % comes in.
The relative distribution of current and past-due receivables can be better understood by looking at the percentage of current accounts receivable. Instead of focusing just on past-due payments, this enables teams to take a more proactive approach to high-value receivables.
The percentage of Current Accounts Receivable is contributing to a significant change in A/R departments. It's encouraging a mental change and demonstrating to teams that they must concentrate on the trifecta of age, value, and risk rather than just the oldest receivables to provide the best results. Teams can collect more money quickly and spend less time on past-due payments that will never be received.
