What Metrics Should You Monitor to Measure Accounts Receivable Performance?

Introduction

The success of any business largely depends on its accounts receivable performance. Accounts receivable performance is a measure of how well a business collects payment from its customers on time. In order to maintain the financial health of the organization, it is important to track and measure accounts receivable performance. This includes monitoring key metrics like Days Sales Outstanding (DSO), Cash Application Rate, and Collection Ratios, just to name a few.

In this blog post, we will look at the major metrics to monitor and measure accounts receivable performance and how they can help you gain better visibility into your cash flow and financial health.

Top Metrics to Monitor Accounts Receivable Performance

Monitoring accounts receivable performance with certain metrics can help leaders make better strategic business decisions and understand the health, opportunities, and risks of their receivables. Gathering metrics, such as days sales outstanding, total accounts receivable, and uncollectable accounts, can provide insight into the accounts receivable operations.

Days Sales Outstanding

Days Sales Outstanding (DSO) measures the average number of days it takes for a business to collect payment. This metric should be tracked to understand the effectiveness and efficiency of the accounts receivable process. DSO is calculated by dividing the average accounts receivable balance for a given period by the total net credit sales for the same period, and then multiplying the quotient by the length of the period.

Total Accounts Receivable

Total Accounts Receivable (TAR) represents the total dollar amount of money owed to a business by its customers. This metric should be tracked to get an understanding of the accounts receivable operation’s liquidity. TAR allows a business to understand the current value of customer accounts, and can be used to assess the creditworthiness of customers.

Uncollectable Accounts

Uncollectable Accounts (UCA) measure the percentage of accounts receivable that cannot be collected from customers. This metric should be tracked to identify and better manage customer accounts at risk for becoming uncollectable. UCA can be tracked by comparing the amount of the allowance for doubtful accounts to total accounts receivable.

Best Practices for Monitoring Accounts Receivable Performance

It is important for businesses to monitor their accounts receivable performance in order to ensure that the business is running smoothly and has sufficient amounts of liquidity to cover any short-term needs. Monitoring accounts receivable performance enables businesses to identify trends, resolve any issues, and improve their working capital. Here are some best practices that businesses should follow when monitoring their accounts receivable performance.

Perform Regular Credit Checks

Businesses should perform regular credit checks in order to ensure that their customers are able to pay their bills on time and in full. A business should review its customer's credit history to ensure that they are reliable and have a good payment history. This can help a business identify any potential risks before they become an issue and take the necessary steps to mitigate them.

Analyze Any Variations from Normal Performance

Businesses should analyze any variations from normal performance when it comes to accounts receivable. This includes changes in customer credit terms, customer payment patterns, invoice volume, and any other changes that could affect the company's revenue cycle process. By analyzing these variations, businesses can identify any issues quickly and take action to reduce their impact.

Utilize Automated Monitoring Tools

Businesses can use automated monitoring tools to monitor their accounts receivable performance. These tools can help businesses track payments and generate reports regarding overall accounts receivable performance. These reports can provide valuable insights into how the accounts receivable process is being managed, as well as identify any discrepancies or inefficiencies that may be present.

• Tools can help in tracking payments, generating reports, and identify discrepancies.
• Analyze any variations from normal performance.
• Perform regular credit checks.

Benefits of Monitoring Accounts Receivable Performance

Monitoring accounts receivable performance has significant benefits that can improve your organization's operations. Maintaining accurate metrics related to the accounts receivable process can yield strong results, including timely payment of invoices, improved cash flow, and increased visibility into business performance.

Timely Payment of Invoices

Monitoring metrics such as average number of days until invoices are paid, bad debt write-offs, and DSO (Days Sales Outstanding) of customers can provide insight into the effectiveness of accounts receivable performance. By closely tracking this information, businesses can identify opportunities to improve their accounts receivable procedures and ensure invoices are paid in a timely manner.

Improved Cash Flow

Improved accounts receivable performance can lead to increased cash flow, as invoices are paid more quickly. This can be especially important for businesses with limited access to external funding, as cash on hand is necessary for daily operations. Improved cash flow can lead to less stress for the business and increased flexibility for the organization's growth.

Increased Visibility into Business Performance

Monitoring accounts receivable performance can provide insight into a business's overall performance. By closely tracking metrics such as customer delinquencies, average days to payment, and bad debt write-offs, businesses can identify trends that can help inform strategic decisions. This increased visibility into performance can provide valuable insight into operational issues and opportunities for improvement.

5. Strategies to Improve Accounts Receivable Performance

Understanding the metrics associated with accounts receivable performance can help businesses identify areas where they can develop sound strategies to improve payment times and lower bad debt losses. Here are some strategies that businesses can use:

A. Accurate Invoicing

Businesses should ensure that all invoices are accurate and include the right details. This can help to minimize disputes and ensure timely payments. Businesses should also review the pricing, terms and conditions of the invoices to make sure that they accurately reflect the agreed-upon transaction.

B. Open Communication and Negotiation with Clients

Businesses should maintain regular interactions with clients to ensure open communication and effective negotiation. They should also encourage clients to bring up any queries or issues that they may have regarding the invoice before the due date, so that these can be resolved promptly.

C. Ensure Prompt Follow-up with Clients

Businesses should ensure that they follow-up with clients promptly after the payment due date. Starting a conversation in a timely manner can help to build trust and encourage clients to pay on time. Businesses should also consider providing incentives or discounts for prompt payment, if possible.

Challenges of Improving Accounts Receivable Performance

Accounts receivable performance is one of the most important financial metrics for companies to measure. With proper monitoring, businesses can identify opportunities to manage, measure, and improve their receivables quickly. However, there are a number of challenges involved in improving accounts receivable performance.

Late Payments

One of the most common challenges with accounts receivable performance is late payments. Organizations may struggle to keep up with customer payment deadlines and must take a proactive approach to collecting payments. This process can involve increased communication between customers and businesses, as well as stringent payment policies and penalties. Organizations should also consider automated payment solutions and reminders to keep track of payments and ensure they are received strictly on time.

Uncooperative or Uninformed Clients

Uncooperative or uninformed clients can often be a challenge when it comes to accounts receivable performance. Businesses may struggle with clients who are unwilling to cooperate or are unclear about their payment obligations. As such, organizations should ensure that all clients are aware of their payment terms. This process can involve increased communication, as well as written payment agreements. Organizations should also consider automated payment solutions, such as invoicing apps and payment reminders, to ensure that clients stay informed of their payment obligations.

Limited Resources

Managing accounts receivable performance can require a significant amount of resources. Businesses may struggle if limited resources are preventing them from adequately managing their receivables. Organizations should consider seeking outside assistance or consulting services to help with accounts receivable performance monitoring. Additionally, businesses should consider automated solutions, such as invoicing, payment processing, and payment reminders, to help automate manual processes and free up valuable resources.

Conclusion

Monitoring and measuring the performance of accounts receivable is an important part of managing cash flow and improving business performance. Knowing which metrics to watch and having a system in place to assess, update, and take action on current and upcoming accounts receivable is critical.

A. Summary of the Need to Monitor and Measure Accounts Receivable Performance

The key measures you should monitor to accurately measure accounts receivable performance include average days in accounts receivable, Accounts Receivable Turnover Ratio (ARTO) or Days Sales in Receivables (DSR), Receivables-to-Sales Ratio, credit sales as a percentage of total sales, current cash received, and aged accounts receivable analysis. Monitoring these metrics over time to make adjustments and improve collection or credit policies can help ensure that a business is healthy and free cash flow is preserved.

B. Final Thoughts on Improving Accounts Receivable Performance

In addition to monitoring and measuring accounts receivable performance, there are a few best practices businesses should take in order to improve performance. These include offering incentives to motivate customers to pay quickly, streamlining the collection process, and ensuring customer payment terms are crystal clear. With these measures in place and the right tools and systems tracking accounts receivable performance, businesses can better manage cash flow and keep their accounts receivable performance on track.