The last few years were difficult for Accounts Receivable (A/R). Global economic and operational uncertainty forced millions of businesses to refocus on the importance of cash to ensure their survival. And practically speaking, that means pushing A/R and collections teams to collect more cash from a customer base that’s less likely to pay on time than ever.
That’s a tough task by anyone’s standards. But the upside is that this increased focus on cash has put A/R in the spotlight once more, and driven more organizations to think critically about how they measure and enable effective and productive collections.
If the last few years were times of disruption, we’re now heading into a year of recalibration. As companies focus on recovery and building their organizations back to full strength, their A/R teams and processes need to be able to execute at maximum capacity.
To help, we’ve brought together five KPIs you should be measuring to get a comprehensive picture of A/R performance — and get a clearer idea of where and how your team’s performance can be improved.
Average Days Delinquent(ADD) provides a decent snapshot of your overall collection’s performance — making it a valuable metric for those looking to gain a quick, reliable view of how their team is executing at a glance.
This is largely thanks to how simple the KPI is to calculate, and how reliable and accessible the data inputs for it are. All ADD is concerned with is the due date of a receivable (usually captured reliably in contracts and invoices), and the paid date of that receivable (reliably captured at the point of payment).
At the most basic level, ADD offers a valuable, high-level view of collections performance, while asking very little of you or your team. There’s no data deep-dive to do, very little scope for bias or inaccuracy to creep in, and the calculation behind it is very straightforward.
Recent research by Celonis found that the highest performing organizations were able to achieve an ADD of just 8 days. But across all organizations, the average figure was 29.9 days. If your figures are above that number, you’ve likely got some collections performance issues on your hands. If you want to understand where those issues may be coming from, you’ll need to look at some other, more advanced metrics.
DSO is the most commonly tracked KPI for Accounts Receivable — and for good reason. By determining the average number of days it takes to collect payments, you can monitor cash flow at an individual customer and organizational level.
By helping to identify problem payers and the customers frequently pushing your ratio up, DSO starts to highlight some basic next steps and priorities for improving collections execution. It helps you understand at a very basic level where issues may be originating from on the customer side. Fluctuations in DSO can even help you understand how different market forces influence payment times, so you can adapt your Accounts Receivable strategy accordingly.
Lower average DSO is obviously better when it comes to maximizing cash flow, but very low DSO is typically only possible for those in certain industries, such as retail. Payment terms and collection effectiveness are the twin levers here.
The big problem with DSO is that it doesn’t consider receivables before they’re due. It’s only concerned with receivables that have already become a problem. So it can’t do anything to help your collections team work proactively. That’s where percentage of current A/R comes in.
Percentage of Current A/R helps you better understand the relative distribution of current and overdue receivables. Instead of just looking at the payments that are late, it helps teams to be more proactive about high-value receivables that are about to come due.
Percentage of Current Accounts Receivable is helping to drive a real transformation in A/R departments. It’s supporting a shift in mindset and showing teams that to execute at maximum capacity and deliver the best results, they need to shift their focus away from just the oldest receivables, and instead focus on the trifecta of age, value, and risk. That way, teams can recover more cash, faster, and waste less time on delinquent payments that are never going to come in.
Understanding the execution gaps in your collection processes — and how to eliminate them — is vital when maintaining tight control over your cash. But it can be difficult to see exactly where your teams are working ineffectively. And metrics like DSO, which only provide an overall sense of your cash flow health, don’t provide a complete, reliable picture.
Your Collections Effectiveness Index (CEI) however, looks specifically at the effectiveness of your collections department at securing overdue payments within a specific time period. By calculating the percentage of collected payments against available receivables, you can see clearly whether or not you might have a problem. Technology like Process Mining or EMS can then more specifically identify where the execution gaps might be.
Ideally, this number should be above 80%, with the best A/R departments out there reaching 83% CEI. If it drops, that’s a clear indication that something is getting in the way of your execution capacity — whether that’s your customer’s health, how you’re targeting specific accounts, or team efficiency.
As your organization and A/R department evolves, tracking this metric frequently and over shorter time periods provides you with up-to-date insight into gaps in your processes, as they occur.
For many organizations, COVID recovery efforts will naturally focus on strategic short-term goals and improvements — the kinds of changes that keep them stable and operational. But during times of change, it’s also important to consider how decisions today could support long-term efficiency gains.
Tracking Operational Cost Per Collection is hugely valuable for supporting long-term improvement and optimization of collections. It’s one of very few metrics that looks beyond receivables alone, and considers how your team’s execution capacity — and the challenges in accounts receivable processes surrounding them — could be maximized to deliver more collections at a lower cost.
Tracking this KPI won’t help you find quick fixes. Nor is it likely to help you understand how your performance stacks up against competitors. And frankly, building a reliable view of your cost per collection based on accurate data that’s free from bias is a difficult task (although one which the right technology can simplify significantly).
But, when tracked accurately, it can support significant changes and optimizations across the A/R department. Take a change like process automation for example. Accurate cost per collection data can help you understand where automation can be applied to help you maximize the execution capacity of your team and deliver the best results.
More and more A/R teams are realizing that there’s only so much they can do to drive collections using the methods and metrics they have in place today. Becoming more proactive has a big role to play in changing that, but so too does looking inward for opportunities to improve efficiency by maximizing your department’s capacity to execute.
Cost per collection is a hugely valuable tool for teams interested in delivering those internal optimizations and improvements.
The last few years haven’t been easy on anyone, but things are at least starting to look better. A/R teams have felt and weathered the disruption — now it’s time to define what they want their lasting ‘new normal’ to look like.
The Accounts Receivable performance metrics outlined above can all play an important role in A/R’s transformation and advancement. By providing unique views of performance, and the sources of A/R challenges, they can contribute to an A/R department that’s both highly aware of its current performance, and clear on what needs to be done to maximize their execution capacity, improve operations and bring more cash into the business.
To find out how Celonis can help you optimize these KPIs and maximize execution capacity in Accounts Receivable, take a look at our Execution App for Collections Management.