It’s often told in the folklore of Sales processes that you can’t achieve what you can’t measure!
Well, I think this holds true for all things in life including AR processes where this is even more true since a sale made is only a notional revenue until the you get the payments in your Bank account.
But then what’s the issue? Understanding which key performance indicators (KPIs) to prioritize is entirely different from understanding that you should be tracking them. Among other things, AR measures like Days Sales Outstanding (DSO), AR aging, and Average Days Delinquent (ADD) are essential for assessing how well your process is working and pinpointing areas that require improvement.
Effective management of the following seven key performance indicators (KPIs) is the first step towards improving AR performance and maximizing cash flow. This blog describes what they tell you, how to figure them out, and how to make them better.
SEVEN KEY AR KPIs TO TRACK & MONITOR
- DSO
- AR Turnover Ratio
- Collections Effectiveness Index
- Past Due and Aging
- Average days Delinquent
- Bad Debt to Sales Ratio
- Percentage of High Risk Accounts
DAYS SALES OUTSTANDING (DSO)
Definition: DSO measures the average number of days it takes for a company to collect payment after a sale. A lower DSO indicates faster cash flow and reflects the efficiency of both credit and collections processes.
Why DSO Matters: By providing a snapshot of the average time to collect payments, DSO helps assess a company’s liquidity and the effectiveness of its AR management. Ideally, DSO should be close to the company’s standard credit terms (e.g., net 30 or net 60 days).
For example: A company with a DSO of 40 days and credit terms of net 30 may need to revisit its collections practices to shorten the gap.
ACCOUNTS RECEIVABLE TURNOVER RATIO
Definition: This ratio shows how often a company collects its average AR balance within a specific period. A higher AR turnover ratio suggests that a company is collecting receivables more frequently, which means quicker cash flow.
Why It Matters: A high turnover ratio reflects efficient collections and supports strong liquidity. Conversely, a low turnover may signal the need for policy adjustments or more active collections follow up.
For example: Tracking the AR turnover ratio over time reveals changes in collections effectiveness, helping AR teams pinpoint and respond to issues before they impact cash flow.
COLLECTION EFFECTIVENESS INDEX (CEI)
Definition: CEI calculates the percentage of receivables collected within a certain time frame, showing how effective the collections team is at converting AR into cash.
Why It Matters: CEI focuses on what was realistically collectible, offering a more accurate view of collections efficiency. A high CEI indicates a well-functioning collections process, while a low CEI may highlight areas that need improvement.
For example: Companies aim for a CEI near 100% to maximize collections efforts. A CEI tracked monthly enables real time adjustments in collections strategy.
PAST DUE AND AGING ANALYSIS
Definition: Aging analysis categorizes outstanding receivables based on the number of days past due. Commonly divided into aging buckets (e.g., 30, 60, 90+ days), this metric highlight overdue invoices.
Why It Matters: Aging analysis pinpoints potential collection issues, enabling AR teams to prioritize efforts on the most overdue accounts. A large proportion of invoices in the 60 or 90+ days categories can signal challenges in credit or collection practices.
For example: Regular aging analysis helps identify problematic accounts or industries, allowing companies to proactively manage credit risk.
AVERAGE DAYS DELINQUENT (ADD)
Definition: ADD represents the average number of days an invoice is overdue, giving insights into how long payments lag beyond the agreed terms.
Why It Matters: ADD isolates the delinquent portion of DSO, highlighting late payments specifically. A high ADD signals collection inefficiencies, while a low ADD reflects effective credit terms and collections.
For example: Reducing ADD directly impacts DSO by minimizing the overdue portion, creating faster payment cycles and healthier cash flow.
BAD DEBT TO SALES RATIO
Definition: This metric reflects the percentage of sales that become uncollectible or bad debt, providing insights into the quality of a company’s receivables.
Why It Matters: A lower bad debt ratio indicates efficient credit and collections policies, while a high ratio suggests the need to tighten credit terms or improve customer vetting.
For example: Monitoring this ratio reveals whether credit terms are too lenient or if certain customers or sectors are becoming riskier.
PERCENTAGE OF HIGH-RISK ACCOUNTS
Definition: This metric identifies the proportion of accounts receivable considered high-risk due to extended overdue balances or known credit issues.
Why It Matters: Tracking high risk accounts helps prioritize collections and manage potential losses, especially in volatile markets. Companies can adjust credit terms for high-risk accounts or implement stricter payment terms to reduce exposure.
For example: A rising percentage of high-risk accounts could signal the need for strategic adjustments in collections or credit policies.
LEVERAGING AR METRICS FOR GROWTH
The path to financial health is paved with strong collections practices and proactive AR management. By keeping a close eye on these seven AR metrics, finance teams can gain powerful insights into their collections process, making data driven decisions that optimize cash flow and reduce risk because these metrics aren’t just numbers on a page—they’re a roadmap to stronger cash flow, lower credit risk, and healthier customer relationships.
So, for companies looking to elevate their AR performance, implementing an automation tool is a gamechanger, offering real-time tracking, streamlined processes, and deeper analytics. This is where Inebura, a SaaS platform to efficiently manage your collection process can help.
To know more how Inebura can help, write to sandeep@inebura.com