How to Measure and Implement Automation to KPIs for Accounts Receivable - Steps 2 and 3
Do you need to make a dent in that pile of overdue invoices? One effective way to improve collections is to be aware of industry benchmarks and follow best practices to guide you. Developing KPIs for Accounts Receivable efforts is a great way to track your progress and build an effective A/R strategy. In this blog, we review the 3 steps to develop and implement KPIs to improve collections and increase cash flow. Download our guide below "How to Take a Winning Approach to A/R Collections" and get expert advice, lots of call scripts and loads of letter templates that are proven to be effective.
In this A/R KPI blog series, we reviewed the 3 steps on How to Get Started with Smart Accounts Receivable KPIs. In step 1 we covered A/R KPI strategy in this blog 7 Tips for the Best Accounts Receivable KPI Strategy. Now we will jump into Steps 2 and 3.
3 Steps Get Started with KPIs for Accounts Receivable and Collections
Step 1 - Establish an Accounts Receivable KPI Strategy
This was previously covered in this blog - 7 Tips for the Best Accounts Receivable KPI Strategy.
Step 2 - Determine what KPI Metrics to Measure
There are standards to measure against and industry benchmarks you
want to meet or beat. The measures to track are as follows, and you can
learn the benchmarks for each measure from your industry association
or trade group.
- DSO – days sales outstanding
DSO formula: current receivables x number of days in analyzed period
/ credit sales for the period analyzed
- Bad debt
Actual bad debt compared to industry local credit groups and/or industry
benchmarks forecasted bad debt versus actual bad debt
- Current A/R vs. past due A/R Percentage
The total dollar amount past due, divided by the amount of total AR.
- Collection effectiveness index
Formula: beg rec + (credit sales / N*) – end total / rec beg rec + (credit sales / N*) – end current rec x 100.
In this formula, *N = number of months or days, *beginning receivables
Measure 1) collection performance versus collection forecast 2) collection performance by collector
- Risk Exposure - Factors to consider
• Cyclical review
• Profit margins
• Management tolerance for bad debt
You can find additional information on standards and benchmarks from NACM here.
In general, you’ll find:
- 26% of invoices 3 months old are uncollectible
- 70% of invoices 6 months old are uncollectible
- 90% of invoices 12 months old are uncollectable
Step 3 - Implement Accounts Receivable KPI Automation
An effective collections strategy includes a lot of information, documents,
correspondence, and workflow processes – too much to manage manually,
and ERP systems don’t have A/R management functionality robust enough
to optimize collections. Accounts receivable (A/R) and collections
management software (CM) answer the question, “Where is my money?”
by tracking and responding to the A/R information that could otherwise fall
through the cracks. “Is ABC company paying on time? If not, when did they
say they would pay? Did they pay when they said they would?”
Download this ultimate guide for expert tips, best practices, and industry benchmarks to help you start using KPIs to improve your A/R and collections efforts.
Why Customers Choose collect-IT by Dynavistics
Accounts receivable and collection professionals turn to us for our expertise in developing and implementing collections strategies and solutions. Businesses across various industries, including wholesale, distribution, food, and beverage, and professional services, use our A/R and collections solution to increase cash flow.
“collect-IT has 100% changed the way we work and has played a big part in supporting the growth of the company. Without collect-IT, it would have been nearly impossible to keep up with collection demands for the growing number of clients.”
Equipment Distribution Company - Tampa, FL
collect-IT is everything you need to manage accounts receivables, control credit, and detect potential issues in one robust collections dashboard. collect-IT is an easy-to-use, flexible, and powerful solution for small and medium-sized businesses. Learn more about collect-IT:
- Universal collections strategy with customizable options
- Automated email functions
- Attach invoices or statements to emails
- Templates for collection correspondence letters
- Calendar and task list functions
- Audit trail for the entire collections process
collect-IT provides you with the tools and insights to manage collections, analyze trends and ensure that your customers pay on time, every time.