How to Improve Your Accounts Receivable Performance Through Analysis of KPIs

Introduction

Accounts receivable (AR) is an important part of any business as it helps monitor cash coming into the organization. AR also provides a detailed documentation of customer invoices and payments. Understanding how accounts receivable works and how to manage it is essential for a successful business.

AR performance is a key metric in understanding how efficiently companies are collecting payments from customers, which is a crucial part of any business’s financial health. The analysis of accounts receivable performance is essential to determine whether your company is improving or declining in its collections.

Key performance indicators (KPIs) are helpful in understanding how accounts receivable affects a business. With the right KPIs, businesses can track accounts receivable very accurately and make improvements accordingly.

Reasons to Monitor Accounts Receivable KPIs

Accounts receivable, one of the most important elements of any business, is concerned with the tracking of money owed by customers. Monitoring Accounts Receivable KPIs (Key Performance Indicators) gives organizations insight into their financial situation and helps them improve their profitability.

Here are some key reasons to monitor Accounts Receivable KPIs in order to improve your financial performance:

Improve Billing Processes

Analyzing Accounts Receivable KPIs can help identify issues within the billing process. This could include issues such as poor invoicing accuracy, late payments, or inconsistent payment times. By analyzing Accounts Receivable KPIs, organizations can pinpoint issues and work to fix them. By improving the billing process, organizations can increase their cash flow, reduce costs, and make their customers happier.

Increase Visibility of Customer Accounts

Monitoring Accounts Receivable KPIs can give organizations visibility into their customers' accounts. This visibility allows them to identify struggling customers or customers who may need assistance with their payments. Organizations can also monitor for changes in customer accounts over time—such as changes in payment methods or late payments—and confront potential issues head on.

Increase Customer Satisfaction

By analyzing Accounts Receivable KPIs, organizations can ensure their customers are getting the best service possible. This could include improving the billing process, such as providing customers with accurate and timely invoices. Organizations can also offer flexible payment terms or discounts for early payments. This will help organizations build a better relationship with their customers and increase customer satisfaction.

Prepare for Budgeting

Monitoring Accounts Receivable KPIs can also help organizations prepare for budgeting. By having visibility into their customers' accounts, organizations can anticipate their future cash flow and plan their budget accordingly. Additionally, organizations can use Accounts Receivable KPIs to analyze their historical payment data and plan for any potential bumps in the road ahead.

Selecting Which Accounts Receivable KPIs to Analyze

Accounts Receivable (AR) KPIs provide insight into the performance of your AR processes. To ensure that you are getting the most out of your accounting performance, it is important to analyze the right AR KPIs. Here are some of the key AR KPIs that are important to analyze:

1. Revenue per Invoice

The revenue per invoice is the total amount of revenue generated from each individual invoice. This KPI provides an insight into your revenue management, as a higher revenue per invoice suggests that you are setting higher prices for your products and services. This KPI can help you identify if positive changes in pricing are having the desired effect on your revenue.

2. Average Days Sales Outstanding

Average days sales outstanding is a metric that tracks the average number of days that a company has to wait to receive payment on invoices. This is an important metric to track, as it provides insight on how quickly customers are paying invoices. By tracking this KPI, you can get a better understanding of your AR performance.

3. Payment Terms Mix

Payment terms mix is a metric that tracks the variety of payment terms that customers use when making payments on invoices. The payment terms mix can provide an insight into customer behavior and preferences related to payments. Monitoring changes in payment terms over time can be a useful tool to analyze your AR performance.

4. DSO

Days Sales Outstanding (DSO) is a metric that tracks the average number of days it takes to receive payment on invoices after they have been sent out. This metric is important to track, as it provides an indication of your AR performance and can give you insight into customer payment behavior. By tracking changes in your DSO, you can get a better understanding of how effective your AR processes are.

Collecting Data for Accounts Receivable KPI Analysis

Improving accounts receivable performance requires a thorough analysis of your accounts receivable Key Performance Indicators (KPIs). In order to perform a meaningful analysis, you must have access to the data which is associated with those KPIs. There are a few main ways to collect the data necessary for analysis.

Use Current Accounting Software

One of the main sources of data when it comes to analyzing accounts receivable KPIs is your current accounting software. This software can provide you with both summary and detailed information, depending on the level of granularity you require. Your software should also be able to provide different levels of detail, allowing you to drill down into the data to find the exact information you need. The software should also provide you with easy-to-read graphs and charts that allow for quick visual analysis of the results. By utilizing your current accounting software, you can quickly collect the data you need for your accounts receivable KPI analysis.

Gather Data from Other Sources

In addition to using your current accounting software, it may be beneficial to look at other external sources of data when it comes to accounts receivable analysis. For example, you may want to look at relevant industry data or customer survey data to gain more insight into customer behavior. These sources can provide valuable information that may not be apparent when looking solely at accounting software data. Additionally, these sources can be combined with accounting software data to gain a better understanding of your accounts receivable performance.

• Utilize current accounting software as the main source of data.
• Look to other sources of data to gain more insight into customer behavior.
• Combine internal and external sources to gain a better understanding of accounts receivable performance.

Analyzing Accounts Receivable KPIs

A key performance indicator (KPI) analysis helps businesses understand their accounts receivable performance. This analysis uses collected data to identify trends, develop forecasts and make informed decisions impacting profits and cash flow. A successful KPI analysis requires tracking of the following primary accounts receivable KPIs.

Analyze Trends

The first step in a KPI analysis is to analyze trends. This step helps businesses recognize when their receivables are trending higher or lower and determine why. Tracking the payment cycles of customers is one way to conduct this analysis. This can serve as historical data to compare changes in customer behavior. Additionally, analyzing the amount of outstanding invoices as a percent of total sales helps businesses make forecasts and plan accordingly. This analysis should be conducted regularly to ensure accounts receivable performance remains within desired parameters.

Isolate Outliers

The KPI analysis should also include the identification and isolation of outliers. This involves determining which invoices are generating the highest amount of cash flow and isolating them for further investigation. Such invoices may be addressed differently by introducing incentives in order to move them more quickly through the accounts receivable process. Likewise, identifying delinquent accounts and working to find solutions that resolve outstanding balances should also occur. This helps businesses maintain a healthy accounts receivable ratio and can prevent their receivables from becoming too high.

Taking Actions in Response to Results from Accounts Receivable KPI Analysis

Analyzing your accounts receivable KPIs is just the beginning – the results of this analysis will reveal the processes and procedures related to billing and other accounts receivable tasks that need to be improved. It is up to business owners to follow through and take action to improve their accounts receivable performance.

Adjust Billing Processes

Billing processes are some of the most critical aspects of accounts receivable, and they need to be adjusted to ensure customers are receiving the correct information when their payment is due. If customers are not receiving the correct information, they may make mistakes in the payment process or become frustrated with the complexity of the billing system. To ensure an efficient billing process, businesses should review their invoices to make sure their customers are given accurate, up-to-date information about their accounts.

Address Customer Fees

Customer fees can have a significant impact on accounts receivable performance. Customer fees should be evaluated on a regular basis to make sure they are fair and in line with industry standards. If customer fees are too high, customers may be less likely to pay what they owe. Business owners should also consider offering discounts or promotions to customers to incentivize payment.

Assign Clear Goals for Accounts Receivable Team

Having a well-defined accounts receivable team with clear goals is essential for improving accounts receivable performance. Each team member should have a specific set of tasks they are responsible for, such as tracking customer payments and reaching out to delinquent customers. Establishing team goals can help motivate team members to work together to reduce delinquencies and increase accounts receivable collections.

• Adjust billing processes
• Address customer fees
• Assign clear goals for accounts receivable team

Conclusion

Analysis of your key performance indicators (KPIs) can help streamline accounts receivable performance and encourage success in your organization. The right accounts receivable KPIs can provide you with an understanding of the collection performance with your customers and help you create effective strategies to reduce bad debt.

Summary of Accounts Receivable KPI Analysis

KPIs provide visibility into the effectiveness of accounts receivable activities. These actionable insights give organizations a deeper understanding of the financial performance of the accounts receivable process, enabling them to make data-driven decisions about collection and strategy. KPI analysis can provide insight into the average payment times, average daily outstanding balance, and bad debt percentage, among other performance indicators.

List of Tangible Results of Accounts Receivable Analysis

• Faster time to payment and increased cash flow
• Reduction in bad debt
• A cost effective way to reduce debts
• Improved internal processes
• Increase in customer satisfaction

Accounts receivable analysis can help you unlock the full potential of your organization. With the right accounts receivable KPIs in hand, you can quickly identify areas of strength and weakness and create strategies to improve processes and reduce bad debt.