How to Track Accounts Receivable KPIs Effectively

Introduction

Accounts Receivable (AR) is the total amount of money owed to a company from its customers or clients for goods or services already provided or delivered. AR is an essential part of a company’s financial health and can tell a story about how a firm manages its customer relationships and its cash flow. To track and monitor accounts receivable effectively, it is important for businesses to utilize Key Performance Indicators (KPIs).

What Are KPIs?

KPIs are quantifiable measurements that demonstrate how effectively an organization is achieving its objectives and goals. KPIs compile and analyze data to provide insight into how a company is performing, allowing businesses to strategize, optimize, and make adjustments as needed.

Benefits of Tracking Accounts Receivable KPIs

Accounts receivable (AR) key performance indicators (KPIs) are metrics that are used to measure and manage the performance of accounts receivable processes. Properly tracking and monitoring these KPIs allows businesses to examine their financial health and identify areas where improvements can be made. Tracking these KPIs can bring numerous benefits to any organization.

Improved Cash Flow

Proper tracking of accounts receivable KPIs can help to improve the cash flow of an organization. AR KPIs will help to identify how much time customers are taking to pay, as well as how much they owe. When businesses have a full understanding of their customers' payment habits, they can develop better strategies to ensure that invoices are being settled promptly and that any issues are dealt with quickly. By having knowledge of the payment behaviors of their customers, businesses can ensure that they are not running at a financial loss due to late payments.

Enhanced Visibility of Financials

Having visibility of accounts receivable KPIs provides a clearer picture of the organization’s finances. Being able to monitor and identify areas of improvement can help businesses to make better decisions that are based upon accurate and up-to-date data. AR KPIs will identify any issues that may be impacting the cash flow, such as late payments or outstanding invoices. This allows for businesses to take timely action to ensure that these issues are being resolved in a timely and efficient manner.

Easier Decision Making

Having a clear understanding of accounts receivable KPIs enables businesses to make more informed decisions. This can help to ensure that businesses are making the most of their resources, as well as ensure that any financial risks are identified and addressed. By analysing customers' payment trends and historic data, businesses can determine which customers are trustworthy and which may need additional oversight. AR KPIs provide businesses with the insights they need to make the right decisions and to ensure that customers are paying promptly.

Common KPIs for Accounts Receivable

Tracking Key Performance Indicators (KPIs) for Accounts Receivable (AR) is an important part of financial operations. KPIs represent important metrics that allow organizations to monitor how effectively they are billing and collecting from customers. Here are some of the common KPIs for tracking accounts receivables.

DSO (Days Sales Outstanding)

Days Sales Outstanding (DSO) is a reliable measure of a company’s performance in collecting payment from customers. It is calculated by dividing the total AR balance over a given period of time with the total net sales over the same period of time. A low DSO suggests that the company is collecting payments from customers quickly and efficiently, whereas a higher DSO points to either slow payment habits or bad accounts receivable.

Bad Debt Expense

The bad debt expense (or allowance for doubtful accounts) is a value which companies record in their accounts receivable when they predict that a certain portion of the receivable will not be paid. Bad debt expense is calculated based on past experience with customers and assessing the risk associated with their payment capabilities. Tracking bad debt expense is important for preventing companies from suffering large losses that would not be taken into account in the DSO calculation.

AR Turnover

AR turnover is another important metric for understanding the efficiency of a company’s billing operations. This metric is calculated by dividing the net credit sales over a period of time with the average accounts receivable balance over the same period. A high AR turnover suggests that a company is billing and collecting payments quickly, whereas a low AR turnover may signify slow payment habits or issues with customers’ credit terms.

Steps for Tracking Accounts Receivable KPIs

In situations like cash flow management, tracking accounts receivable KPIs (Key Performance Indicators) can help businesses make timely payments, identify potential issues and avoid any unwelcome surprises. Knowing the right metrics to track and acting on them in a timely manner is crucial.

Calculate Metrics Regularly

The best place to start is to understand what metrics need to be tracked, and when these metrics should be tracked. This can vary based upon the type of business and their normal activities. Common metrics to track include the following:

• Days Sales Outstanding (DSO)
• Average Days Late (ADL)
• Monthly Closing Average
• Rate of Return (ROR)

It's important to calculate the metrics at regular intervals to gain insight into the performance of accounts payables and receivables and to measure the efficiency of receivables management. This can help you identify discrepancies, such as those indicating fraud or late payments.

Analyze the Data

Once the metrics have been calculated, you should review the data to identify trends. Identifying patterns can help you make better decisions and accurately predict when payments may be late. It is also important to compare accounts receivable KPIs among different periods, to gain a better understanding of the performance of different business units and objectives. This can help identify areas that need attention and more efficient processes.

Identify Potential Issues

Once you have considered the data and identified trends, you should make an assessment of potential issues. This includes analyzing the data for possible errors or inconsistencies, as well as looking for any signs of fraud or late payments. If any discrepancies are found, you should analyze how these could be addressed.

Take Action as Necessary

If potential issues have been identified, it is important to take necessary actions to remedy the situation. This could include steps like negotiating better payment plans, increasing on-time payments, or even bringing legal action if needed. It is also important to adjust strategies and processes in order to minimize future issues with accounts receivable.

Technology Solutions for Tracking Accounts Receivable KPIs

The next step towards effectively tracking accounts receivable KPIs is to leverage modern technology solutions. Today’s digital tools make it possible to take a closer look at the performance of your accounts receivable and stay organized and up-to-date on all accounts.

Financial Dashboard Software

Utilizing financial dashboard software, you’ll be able to create a comprehensive, up-to-date view of your accounts receivable performance. This is incredibly beneficial as it allows you to have all the information you need to make decisions about all aspects of accounts receivable in one place, for improved visibility and better analysis. Additionally, this type of software often includes drilldowns and modifiable visuals to make it easy to identify specific insights.

Automated AR Tracking Tools

Another technology-driven solution for tracking accounts receivable KPIs is automated accounts receivable tracking tools. With automated tracking, account managers can quickly and easily access key performance indicators, as well as overdue and aging accounts. This makes it much easier to monitor trends and performances over time, as well as identify opportunities for improvement. In addition, some of these automated tools also offer notification systems, which can further simplify accounts receivable management by reminding appropriate personnel when certain tasks need to be completed.

Best Practices for Tracking Accounts Receivable KPIs

Update Database Regularly

The main benefits of updating your accounts receivable database regularly is that it removes any elements of inaccuracy and allows you to keep track of payments within a timely manner. An up-to-date accounts receivable database will ensure that customer data and payment information is accurate, which minimizes errors and reduces the time you need to spend managing invoices.

Monitor Changes in AR Metrics

By frequently monitoring changes in accounts receivable metrics, you will be able to identify any potential issues and address them quickly. Pay attention to the regularity of payments and evaluate any customer feedback. Keeping a close eye on accounts receivable metrics will help you to stay on top of customer payments and ensure that all payables are received on-time.

Set Goals & Objectives

Having objectives and goals in place will help to improve accounts receivable management processes. Setting objectives should take into consideration the expected total revenue, current accounts receivable amounts, customer satisfaction rates and customer-specific payment habits. Implementing and tracking goals regularly will help you to identify any potential obstacles and actively manage accounts receivable over time.

Encourage Regular Payment

In order to effectively manage accounts receivable, you should encourage customers to make regular payments. Payment terms should be established prior to invoicing and payment schedules should be clear and being communicated to customers. Establishing payment plans can make it easier for customers to make regular payments which will also help to reduce accounts receivable delinquency over time.

Conclusion

Having effective measures to track your Accounts Receivable KPIs is essential for a successful business. Knowing where your AR is coming from, when customers are due payments, and why some payments are late are all important aspects of tracking Accounts Receivable KPIs. The following summarizes the key points for tracking Accounts Receivable KPIs:

Benefits of Tracking Accounts Receivable KPIs

Tracking Accounts Receivable KPIs helps businesses improve cash flow, strengthen customer relationships, reduce transaction costs, and understand their customer base. As a result, businesses can better plan and manage their finances and establish sound business practices.

Necessary Steps and Technology Solutions for Tracking Accounts Receivable KPIs

Businesses need to create invoices, keep accurate records, stay up-to-date with customer payments, and use a tool or technology solution to track Accounts Receivable KPIs. To make tracking Accounts Receivable KPIs even easier, businesses can make use of AI-backed solutions for optimal results.

Best Practices for Tracking Accounts Receivable KPIs

• Monitor cash flow regularly, especially in slower months.
• Stay on top of customer follow up which keeps customers informed of their obligations.
• Adopt a good invoicing practice to ensure that customers are aware from the beginning of their obligations.
• Set up payment plans and restructure any overdue accounts when possible.
• Use technology solutions to make tracking Accounts Receivable KPIs easier and more efficient.

By following the guidelines above and leveraging technology solutions, businesses can more effectively track Accounts Receivable KPIs and manage their finances and customer relationships better.