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What metrics should you track to monitor invoicing impact on cash flow and profitability?

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Invoicing is a crucial process for any business that sells goods or services, as it affects both cash flow and profitability. However, invoicing can also be challenging, especially if you have multiple clients, different payment terms, and various billing methods. How can you track and optimize your invoicing performance to ensure you get paid on time and maximize your profits? Here are some metrics that you should monitor regularly to assess your invoicing impact on cash flow and profitability.

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Ilan Aronson CA(SA)

CA(SA) | Senior Associate Mazars | Love to write??
Iván Fernández Llorca

Profesor de ciclos formativos comercio internacional, marketing y logística.
Judy Blattner

Senior Account Analyst at Amwins Insurance Brokerage

1 Days Sales Outstanding (DSO)

Days Sales Outstanding (DSO) is a measure of how long it takes you to collect payments from your customers after you issue an invoice. It indicates the efficiency of your credit and collection policies, as well as the risk of bad debts. A high DSO means that you have a lot of money tied up in accounts receivable, which reduces your cash flow and increases your financing costs. A low DSO means that you have a fast cash conversion cycle, which improves your liquidity and reduces your dependence on external funding. To calculate your DSO, divide your average accounts receivable by your average daily sales.

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2 Invoicing Accuracy Rate

Invoicing Accuracy Rate is a measure of how often you send correct invoices to your customers, without any errors or discrepancies. It reflects the quality of your invoicing process, as well as the satisfaction of your customers. A high Invoicing Accuracy Rate means that you avoid mistakes that can lead to disputes, delays, or refunds, which can damage your reputation and cash flow. A low Invoicing Accuracy Rate means that you have a high rate of invoice rejections, corrections, or adjustments, which can increase your administrative costs and customer churn. To calculate your Invoicing Accuracy Rate, divide the number of accurate invoices by the total number of invoices issued.

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Iván Fernández Llorca

Profesor de ciclos formativos comercio internacional, marketing y logística.
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It is very important to send invoices to customers without errors, either by quantity, price or VAT. This not only improves our image with the customer, but also reduces the workload of re-invoicing or posting debit notes. To achieve this, all departments must be aligned: transport, SAC, KAM and accounts receivable.

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3 Invoice Aging

Invoice Aging is a report that shows the breakdown of your accounts receivable by the number of days that they are past due. It helps you identify the customers that are late in paying their invoices, and the amount of money that they owe you. It also helps you prioritize your collection efforts, and take appropriate actions to recover your outstanding payments. A healthy Invoice Aging report should have a low percentage of overdue invoices, especially in the older categories, such as 60 days or more. A high percentage of overdue invoices means that you have a high risk of bad debts, and a low cash inflow.

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Ilan Aronson CA(SA)

CA(SA) | Senior Associate Mazars | Love to write??
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It is vital to track aging accurately however accurate tracking is not enough. There must be meaningful collaboration between the accounting team and the debt collection team. Collection of over due debts is all about contact and ensuring people are aware of the money they owe. This will allow for quicker collections and better collection ratios to show to shareholders. Another interesting metric is days since last contact. It is a more operational measure than a financial measure, however it is useful in demonstrating the collection teams success.

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4 Gross Profit Margin

Gross Profit Margin is a measure of how much profit you make from your sales, after deducting the cost of goods sold. It indicates the profitability of your core business activities, as well as the efficiency of your pricing and production strategies. A high Gross Profit Margin means that you have a strong competitive advantage, and that you can cover your operating expenses and generate net income. A low Gross Profit Margin means that you have a low pricing power, or a high cost structure, which can reduce your net income or cause losses. To calculate your Gross Profit Margin, divide your gross profit by your total sales.

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5 Customer Lifetime Value (CLV)

Customer Lifetime Value (CLV) is a measure of how much revenue and profit you can expect from a customer over the entire duration of your relationship with them. It reflects the value of your customer retention and loyalty, as well as the effectiveness of your marketing and sales strategies. A high CLV means that you have a loyal and profitable customer base, that generates recurring and consistent revenue for your business. A low CLV means that you have a high customer acquisition cost, or a high customer turnover rate, which can reduce your revenue and profitability. To calculate your CLV, multiply your average customer revenue by your average customer lifespan, and subtract your average customer acquisition cost.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Judy Blattner

Senior Account Analyst at Amwins Insurance Brokerage
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I would track debit and credit memos. if the invoices are accurate and being paid, them np effect om your cash flow. However, if credit and debit memos are frequently being issued and at how many days past due are they being issued both slow down the collection process especially in todays digital world where more often we are not touching items unless needed, Anything edited would require a manual entry in many places while being processed by all involved,

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What metrics should you track to monitor invoicing impact on cash flow and profitability?

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1 Days Sales Outstanding (DSO)

2 Invoicing Accuracy Rate

3 Invoice Aging

4 Gross Profit Margin

5 Customer Lifetime Value (CLV)

6 Here’s what else to consider

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