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Unlock Cash Flow Excellence: 6 KPI for Accounts Receivable 

Author

Monica Neumann

https://www.linkedin.com/in/monica-neumann-pmp/
monica.neumann@auxis.com

PMP | Sr. Manager - Finance Transformation

In brief:

  • An effective and efficient accounts receivable department is vital as improving cash flow remains a top CFO priority in 2024.
  • Tracking the right metrics can uncover performance issues and help you strategically improve AR processes while lowering costs.
  • Learn 6 important accounts receivable KPIs every organization should track – and smart strategies for achieving peak performance.

High-performing accounts receivable (AR) operations are vital to steady cash flow, as persistent macroeconomic uncertainty keeps cash flow management a top CFO priority in 2024, states the American Productivity & Quality Center (APQC)’s Finance in Focus report. But maximizing performance requires a clear-eyed view into how your collections process is tracking – and where improvement is needed. 

Inefficient AR processes, invoicing bottlenecks, re-work, and errors delay your organization’s access to cash and create poor customer experiences. At the same time, 8 in 10 companies are experiencing outstanding payments from customers in today’s economic climate – making AR efficiency more important than ever. 

Using key performance indicators (KPIs) to uncover challenges and strategically improve your AR process enables better liquidity and working capital management: helping organizations speed access to cash, improve the average accounts receivable balance, recover delinquent accounts, apply collected payments on time, and resolve disputes without damaging customer relationships.

Accounts receivable performance metrics: are you a top performer?

No single key performance indicator reveals everything you need to know about how your collections efforts are performing. Ultimately, the AR metrics you choose should reflect what matters most for your business.

But five key benchmarks stand out as essential to improving efficiency and effectiveness in your Order-to-Cash (O2C) organization: 

1. Days Sales Outstanding

Deemed the top metric for evaluating AR performance, Days Sales Outstanding (DSO) tracks how quickly your customers pay their bills. This KPI is closely linked to cash reserves and liquidity – making it an essential metric to track amid economic uncertainty.

After all, the faster you are paid the money you are owed, the more breathing room for your organization.

Tracking DSO helps CFOs identify bottlenecks in their AR process, enabling corrective actions and best practices before issues turn into bigger concerns. DSO also provides insight into customer satisfaction and creditworthiness.

To calculate the days sales ratio: divide your total AR balance by your net credit sales and multiply by the number of days in the period you are measuring. For example, if you have a total AR balance of $10,000 and credit sales of $50,000 in a 30-day month, your DSO is 6 for that month.

Days Sales Outstanding Formula

The lower your DSO, the better your AR performance. If your DSO is high, your team is not collecting revenue fast enough – and your cash flow is probably suffering. For businesses with seasonal sales or sales that fluctuate often, calculating DSO per quarter instead of per month helps normalize your data and spotlights trends over time.

Days Sales Outstanding Graph

So, what’s a good number? The median DSO across every organization is 38 days, according to APQC data. But what constitutes a “good” score varies across industries: for instance, the median DSO in the healthcare industry is 38 days but in the retail sector, it’s 32. Benchmarking your business against others in your industry creates the most accurate assessment of performance.

Finance Benchmarks: Prophecy or Pretense?

Finance Benchmarks: Prophecy or Pretense? Whitepaper Mockup

2. Total Cost of Performing AR Processing Per Customer Receipt 

This measure looks at the amount of money you’re spending to collect each payment and book the cash application, reflecting how well your AR costs are managed.

Cost-effectiveness can be measured in several ways. For example, APQC benchmarks AR organizations based on the total cost of performing AR processing per customer receipt.

To calculate your cost-effectiveness: Divide the total cost of processing payments due from customers (think: personnel, systems, labor, outsourcing, etc.) by the total annual number of receipts processed.