Proper management and monitoring of accounts receivables is a key factor in a company’s financial health. Measuring the performance of your receivables enables you to anticipate and optimize your cash flow. For example, a receivables position that includes a large number of overdue invoices can jeopardize cash flow due to a lack of incoming flows, and create significant cash shortfalls that can lead to suspension of payments in the most serious cases. To avoid this, it is essential to monitor key performance indicators for trade receivables. These are also known as KPIs for Key Performance Indicators. It’s crucial to understand that the department in charge of accounts receivable must be particularly vigilant and responsive. We’d like to take a closer look at the key KPIs you should be monitoring on your dashboards, to help you assess the performance of your accounts receivable management.
9 key performance indicators to measure your accounts receivable performance
There are 9 key accounts receivable indicators to track, including the following KPIs:
- DSO ;
- aged trial balance ;
- late payment rate ;
- rate of unpaid invoices ;
- WCR ;
- the expiry rate ;
- collection forecasts ;
- analysis of causes of disputes and delays ;
- customer outstandings.
1 – DSO
DSO stands for Days Sales Outstanding. It is a receivables indicator that enables us to determine the average time taken to pay invoices, either globally or for a specific customer.
It’s essential to monitor this KPI for debt collection, because the longer the average delay, the higher the risk of non-payment. This can jeopardize cash flow balance, as a result of a mismatch between incoming and outgoing flows unrelated to business operations.
That’s why we recommend adopting best practices in receivables management, to reduce your company’s DSO as much as possible.
What’s more, a particularly long DSO can be a sign of a non-optimal invoicing process, an inefficient collection process, or low customer satisfaction leading to disputes and late payments. It is therefore worth paying particular attention to these factors to highlight certain internal organizational problems.
2 – Aged trial balance
The aged trial balance is a document that classifies invoices issued and not yet paid by date of issue. In this way, age brackets are created to identify the oldest unpaid invoices, whether or not they are overdue.
The aged trial balance can therefore be used to identify the payment reminders that need to be carried out as a priority in order to improve debt recovery.
On the other hand, the aged trial balance is a receivables indicator to be monitored, as it reflects the effectiveness of the collection policy in place. For example, if the vast majority of invoices awaiting payment are 90 days old or more, this is a sign that the collection policy needs to be reviewed, particularly in terms of customer profiles and scoring.
3 -The late payment rate
Another indicator for receivables, the late payment rate is the ratio that determines the proportion of overdue invoices among invoices awaiting payment. If the late payment rate is zero, there are no unpaid invoices.
The aim is to keep late payment rates as low as possible. Failing this, the payment policy, collection policy and collection process need to be reviewed. Similarly, the quality of customer service can have an impact on the late payment rate. Indeed, disputes arising from dissatisfaction often lead to non-payment of invoices by customers.
4 -The rate of unpaid invoices
The rate of unpaid invoices provides additional information for analyzing customer receivables. The rate of unpaid invoices is calculated as follows:
rate of unpaid invoices = (losses for the period + provisions for past-due and doubtful receivables for the period – write-backs of provisions for past-due and doubtful receivables) / sales for the period
It is recommended to aim for a rate of unpaid invoices of less than 1% to preserve the company’s cash flow.
5 – Working capital requirements (WCR)
WCR is a key indicator of trade receivables. It determines the extent to which the company can meet its own cash requirements, in order to pay its expenses on time. Depending on its working capital requirements, the company may need to request extended payment terms from its suppliers. It may also request overdraft facilities, or even short-term loans, from its bank.
As a reminder, WCR is calculated as follows:
WCR = average inventories + outstanding trade receivables – outstanding trade payables
An increase in WCR that is not concomitant with an increase in business activity may be symptomatic of a lengthening of payment terms and an increase in non-payments.
6 – The expiry rate
The due date rate is calculated as follows:
overdue rate = overdue invoices / total outstanding receivables
It is therefore advisable to aim for a near-zero overdue rate. To achieve this, it is important to optimize the payment policy, as well as the collection policy and process.
7 – Collection forecasts
Among the accounts receivable indicators to monitor, we also include collection forecasts. This involves identifying cash receipts, i.e. cash inflows, expected in the coming days or weeks. Some collection software packages, such as CashOnTime, make it easy to forecast cash inflows.
Knowing the cash flow forecasts enables you to :
- ensure that the invoice is collected on time;
- anticipate potential payment delays;
- negotiate payment terms with suppliers if necessary;
- efficient cash management.
8 – Customer outstandings
Outstanding receivables are an essential performance indicator for trade receivables. In fact, trade receivables include :
- invoices not issued late ;
- overdue invoices ;
- invoices to be issued.
It therefore corresponds to all debts due and payable by customers to the company. It is possible to monitor the company’s overall customer receivables, or customer by customer.
9 – Analysis of the causes of disputes and late payment
The final customer receivables indicator to monitor is the analysis of the causes of disputes and late payment. By understanding the causes of late payment, you’ll be able to optimize your company’s internal processes. In this way, you can take effective action on receivables, reduce late payments and increase customer satisfaction.
Analysis and interpretation of results
Once you’ve familiarized yourself with your accounts receivable indicators, it’s time to analyze the results. You can start by comparing them with your targets. In the event of any significant discrepancies between the results highlighted by the accounts receivable KPIs and the targets, you can implement the corrective measures needed to optimize the process.
Conclusion
Accounts receivable is a key element in a company’s financial management. It reflects not only the company’s sales performance, but also the efficiency of its accounting and collection processes. To keep on top of it, it’s essential to monitor accounts receivable indicators on a regular basis. It is this analysis of the accounts receivable dashboard that enables the company to implement relevant continuous improvement strategies.
