The Benefits of Tracking Accounts Receivable KPIs

Introduction

Key Performance Indicators (KPIs) are measures of achievement used to track business performance. They are an invaluable asset to any business, especially when it comes to accounts receivable. KPI data provides insight into financial health while also identifying areas of improvement both in the immediate and long term.

There are numerous benefits to tracking accounts receivable KPIs. In this blog post, we will explore what KPIs you should track, how to assess them, and how monitoring these metrics can help your business.

Key Benefits of Tracking Accounts Receivable KPIs

When companies track important accounts receivable KPIs, they gain a better understanding of customer trends, business cycles and improve the way they manage their financials.

Improved Financial Performance

Tracking accounts receivable KPIs helps companies to identify opportunities for improved financial performance. Knowing exactly how much money is owed to a company and when it is expected to be paid allows for better planning and forecasting. Companies can also save money by recognizing errors in accounts before it becomes too late. This could include invoicing and billing discrepancies, duplicate payments and other payments not relating to accounts receivable.

Reduced Customer Collection Cycles

Tracking accounts receivable KPIs can help companies reduce customer collection cycles. Companies can set customer credit limits and set custom payment rules depend on their customers’ creditworthiness. Companies can also look at customer payment trends over time to make sure that payments are received on time. Tracking customer payments also make it easier to spot any irregularities and take the necessary action to resolve them.

Customized Customer Experience

Tracking accounts receivable KPIs can help companies provide a personalized customer experience. Companies can use the data from their KPIs to target specific customers with special promotions and discounts. This can help increase customer loyalty and improve customer satisfaction, leading to higher revenues and profitability.

Tracking accounts receivable KPIs is an essential part of a successful business, as it allows companies to focus on their core goals and objectives, while keeping customers happy and satisfied. With this information, businesses can make informed decisions that can lead to greater financial success.

Common Accounts Receivable KPIs

When tracking Accounts Receivable, it is important to track the right indicators and KPIs to gain valuable insights on how to increase cashflow and improve credit risk and collections management. Common Accounts Receivable KPIs are:

Accounts Receivable Turnover

Accounts Receivable Turnover (ARTO) is a measure of how many times receivables are turned into cash during the accounting period. ARTO is computed by dividing the total net credit sales by the average of the Accounts Receivable balances from the beginning and end of the respective period.

Days Sales Outstanding (‘DSO’)

Days Sales Outstanding (‘DSO’) is the average number of days it takes for a company to collect payments after the invoice is issued. It is calculated by dividing the outstanding Accounts Receivable balance by the total credit sales in the same period and multiplying it by the length of the period (in days).

Unpaid Invoices

Unpaid invoice KPIs provide an overview of the performance of current pending payments and paid invoices. This helps organizations identify trends and bottlenecks in their collections process and improve payment terms and policies.

Credit Risk

Credit risk is the risk of losses resulting from customers not paying for the services/goods provided by a company. Credit risk KPIs measure a company’s credit exposure and help companies to assess the risk and make adjustments to their policies.

4. Improving Credit Management

Accounts receivable KPIs provide insights into the creditworthiness of customers, enabling businesses to maximize potential revenue and minimize potential losses. By tracking and monitoring these, businesses can make more informed decisions to ensure they are managing their credit risk effectively and manage customer relationships more efficiently.

a. Streamlined credit processes

Accounts receivable KPIs can help streamline credit processes. By understanding the payment behavior of customers, businesses can easily identify any discrepancies, adjust credit limits and credit decisions, and pursue swift resolutions for delinquent accounts. This will not only save them time but also help them enhance their customer satisfaction, better manage revenue and cash flow, and identify internal approval process problems.

b. Improved cash flow

Monitoring accounts receivable KPIs can also help businesses identify areas where cash is tight and quickly take action to ensure they have enough liquidity and control their cash flow. This could include measures such as raising capital, renegotiating debt agreements, and delaying payments to suppliers. Additionally, this data can help businesses understand customer payment patterns, seasonal trends, and average turnaround times and use this information to anticipate their cash flow needs and manage their finances more effectively.

Automating Accounts Receivable

Automation is the key to efficient accounts receivable cycles and effective management of accounts receivable KPIs. Automating accounts receivable processes increases accuracy and eliminates the need for manual entry of data, thereby reducing the potential for errors. Automation also reduces paperwork and process time, allowing staff to focus their energy on more productive activities.

There are many ways to automate accounts receivable processes, ranging from implementing cloud-based software to integrating data across departments. Automated systems can be configured to generate regular reports that help managers keep an eye on accounts receivable KPIs, as well as give alerts to potential issues early in the process. Automation of accounts receivable processes can also provide detailed data, helping managers make better decisions.

Implementing a KPI-driven Culture

By implementing a KPI-driven culture, companies can focus on optimizing their accounts receivable cycles and improve their financial performance. Automated systems can help companies track financial performance and provide visibility into their accounts receivable position at any given point of time. This visibility can be used to hone in on areas that need attention or address issues before they become unmanageable.

An effective accounts receivable KPI-driven culture can go a long way in helping managers stay on top of accounts receivable KPIs and quickly respond to issues. These insights can be used to improve efficiency and ensure an effective accounts receivable cycle. This in turn can lead to better financial outcomes and enhanced customer relations.

Predictive Insights into Customer Payments

Understanding existing customer payment behavior can empower finance teams to craft strategies that drive customer loyalty, save costs, and lower debtor days. Examining accounts receivable (AR) KPIs provides an effective way to gain a holistic overview of customer invoice payment patterns and anticipate their behavior in the future.

Measuring customer payment behavior

Analyzing the existing accounts receivable KPIs provides insights into a customer’s overall payment habits. Taking into account the individual customer payment turnaround times and quantifying their mutual impact on the entire accounts receivable process helps provide predictive insights. Managers can use these insights to establish proactive customer payment incentive plans to ensure timely payments.

Setting up early payment incentives

Identifying customers who consistently pay their invoices before the due date can be beneficial for refining the accounts receivable process. To encourage and sustain early payment behaviors, companies can set up loyalty incentives for their customers, such as discounts for paying early. Additionally, to improve the cash flow, regular customers can be offered specialized payment plans that provide flexible and extended payment due dates.

Conclusion

Accounts receivable KPIs are a great tool in understanding a business’s financial situation. They provide an opportunity to measure the effectiveness of cash collections and the credit terms offered to customers. By tracking these metrics on a regular basis, businesses can gain an insight into the population of customers, obtain actionable data about payment timelines and quickly identify trends in payment behavior. Furthermore, tracking Accounts Receivable KPIs enables a business to take corrective steps such as contact customers for overdue payments or adjust its credit terms accordingly.

This blog post outlined the major Accounts Receivable KPIs, the importance of tracking them and some of the strategies employed by businesses to enable them to make well-informed decisions on their credit policies. We encourage businesses to make regular use of Accounts Receivable KPIs to provide the necessary information and gain insights into the financial behavior of customers. Tracking the metrics of their accounts receivable will help businesses make financial decisions that are beneficial in the long-term.