7 Accounts Receivable KPIs to Know and Track

Nowadays, most businesses are concerned about their bottom line to drive revenue-generating business and stand out from competitors. To achieve this, you need to identify and track key performance metrics (KPIs) that help you make data-driven decisions and ultimately, yield the accounts receivable team's success. As a business owner, you might know how to track accounts receivable KPI, but might not know which are the right ones.

Worry not if you don’t have any idea about that because we will dive deep into this topic and discuss more on 7 must-track Accounts Receivable KPIs. It won’t only help you find improvement areas but also ensure you stay on top of your business.?

What are Accounts Receivable KPIs?

Accounts Receivables KPIs are metrics that can be utilized to gauge the success of your team. Basically, it is the unpaid amount for services you have offered or products delivered to customers. Tracking these amounts will help you get a snapshot of whether you’re able to collect cash owed to your company or not.

It can help you analyze what efforts are being made to collect debts in order to improve the company’s cash flow.

7 Accounts Receivable KPIs That You Must Track

We have compiled a list of the right accounts receivable KPIs metrics that you should track regularly in order to reduce unpaid invoices.

1. Days Sales Outstanding (DSO)

Days Sales Outstanding (DSO) is one of the crucial metrics that helps you discover how many days on average your customers take to complete the payment. A lower DSO indicates improved cash flows, whereas a higher DSO states a large amount of money is still stuck into account receivables possibly due to uncleared payments from the customer’s side.

DSO can be calculated by using the following formula:

DSO = (Account receivables /Total credit sales) X 365

2. Accounts Receivable Turnover Ratio

The accounts receivable turnover ratio (ART) helps you understand how soon your AR team is collecting money on average per year. For calculating ART, you need to identify credit net sales and then divide it by accounts receivable.

If the accounts receivable turnover ratio turns out to be high, then the company’s cash flow is ideal. However, in case ART turns out to be low, then you need to put extra effort into boosting the debt collection process.

3. Collections Effectiveness Index (CEI)

The CEI is similar to what its name suggests. It checks the team’s efficiency in collecting account receivables, allowing you to measure what percentage of accounts receivable is collected and how much is remaining over a specific period.

CEI helps you uncover how efficiently your team collected the money earned or if it resulted in debts. The higher the CEI highlights the team’s excellent performance in collecting debts.

4. Bad Debts

It is a crucial metric that estimates the number of unpaid invoices, from which you are unlikely to get money. A bad debt-to-sales ratio allows business owners to make strategic decisions and direct the AR team to focus on key factors.

The bigger the size of this ratio, the more extension of credits. So, you must minimize a bad debt-to-sales ratio in order to get paid from maximum unpaid invoices.

Bad Debt to Sales Ratio formula: (Bad Debts / Annual Sales) X 100

5. Operational Cost Per Collection

Operation cost is another vital factor influencing your company’s bottom line. So, you need to check it regularly to uncover the amount spent on running the business operations, hiring staff, or other material costs. That’s where the operational cost per collection comes in.

It helps you get an idea of how much you spend on collecting accounts receivable. If the operational cost is lower, then your company’s bottom line is higher.?

6. Days Deduction Outstanding(DDO)

DDO is all about knowing the days you spent verifying and recalculating the due amount in the invoice, possibly due to client disputes. The efforts given to identify errors in the invoice and correct the total amount may take time or days. DDO allows you to find out the approx. time taken to resolve the errors. In case the resulting number of days is high, then you are getting paid after such a long time.?

DDO = Total Outstanding Deductions / (Average Deductions Value X Number of Days)?

7. Revised Invoices Number

If your AR team is dealing with frequent revisions in multiple invoices, then something is wrong with your invoicing process. This might be because of errors in manually entered data or inaccuracy in credit terms. It can impact your accounts receivable collection process and therefore you must revise and keep track of such invoices.

You can ask the team to identify the time spent creating or sharing revised invoices using their given formulas.

How to Meet Your KPIs Using Accounting Software?

When it comes to meeting your KPIs for accounts receivable, there is no better way than adopting reliable accounting software. No matter how much manual effort you give, some things are meant to hamper your AR operations. To get rid of such things, you only need software like Moon Invoice that does all your tedious tracking job.

Moon Invoice, a go-to billing software for modern business, ensures you don’t waste time spotting recurring errors and boosts invoice accuracy. In fact, you can generate error-free invoices and reports that need no revisions, helping you achieve accounts receivable your KPIs more easily.

Wrapping Up

Knowing accounts receivable KPIs might be easy, but tracking them is not. The reason is you need to collect data manually to make paid or unpaid invoice reports, which is highly prone to errors. Your AR team might get burned out revising invoices frequently, leading to delays in fulfilling KPIs. However, these issues won't occur unless you have robust accounting software like Moon Invoice.

Alright, on a concluding note, now you know what are the important accounts receivable KPIs metrics that should be tracked regularly. The final decision is all yours whether to go by the conventional method or use automation software.