Accounts Receivable Metrics You Should Be Tracking
Collecting debt from clients can
often be a difficult task. No matter what you do, it is not fun and tends to
only get serious attention when cash flow is needed or after everything else is
done. Invoice payment is the final step
in the sales process and should be planned.
The longer an invoice goes unpaid, the less likely you are to receive
payment. Below are some key metrics to track when managing accounts receivable
and planning to receive payments on invoices.
Days Sales Outstanding (DSO)
DSO indicates the average amount
of days it takes your company to collect funds after a sale has been made. The
lower the DSO is, the more cash is available for business to reinvest in
marketing, sales and operations.
Reducing DSO is one of the largest challenges for many businesses due to
the company-wide strategy that’s necessary to do so. With improved DSO, a business’s cash flow
increases significantly, allowing for funds to be allocated to growing. One simple method to reducing DSO is
converting paper to email with electronic invoicing, which also reduces labor
and material costs. Businesses can often
reduce the collection cycle by 2-6 days after implementing electronic
invoicing. Another strategy includes sending
triggered reminder letters. In most
occurrences, clients do not decide to avoid paying an invoice – they have just
simply forgotten. This is the major
challenge associated with reducing DSO.
Electronic invoicing and reminder emails can greatly assist in
overcoming this challenge.
Write-Offs
Write-offs occur upon the
realization that an asset, in this case accounts receivable, can no longer be
converted into cash or provide further use to the business. Receivables cannot be written off until collection
efforts have ceased. You can base your
IRS write-offs on aging of accounts. If
an account is more than six months old, the likelihood of receiving payment
without a collection agency or lawsuit decreases substantially. The Accounting Minute by Sutherland lists the
percentage of outstanding invoices that will not be paid:
·
26% of invoices 3 months old are uncollectable
·
70% of invoices 6 months old are uncollectable
·
90% of invoices 12 months old are uncollectable
Minimizing write-offs is a key
component in improving cash flow. The
smaller the write-off amount is, the happier the business remains. This means the faster you can reduce the
write-off amount, the better off everyone will be. See more powerful accounts receivable
statistics in the Tips to Improve Cash Flow Infographic.
Credit Risk
Your customers make up your
portfolio of business. With a portfolio,
comes credit risk. We’ve all had customers with a history of paying on time and
those customers that pay, but they pay late. The key to keeping a healthy cash
flow and low DSO is to isolate the late payers.
Later payers can have different credit limits and collection strategies
applied to their accounts in order to reduce risk. Carefully monitor payment
trends with aging reports and implement a credit rating system to reduce
overall credit risk.
The most common way businesses
track credit worthiness is to pull your customers’ credit rating from a
credit-monitoring firm. There are many
credit-monitoring firms our there; popular firms include Dun and Bradstreet,
Experian, and Equifax to name a few.
These firms allow you to check credit on an individual business, a
subset of or your entire customer portfolio.
If you want your customer’s credit rating updated on demand and
available immediately for credit worthiness decisions, select a
credit-monitoring firm that integrates with your account receivable or
collections software system. One of the
oldest and largest credit-monitoring firms is NACM National Trade Credit
Report. The NACM National Trade Credit
Report gives you a predictive score and risk rating on demand through your
accounts receivable or collections software.
An accurate picture of how a customer pays is needed to make the credit
and credit limit decisions to reduce credit risk and increase your chance of
payment.
Discover a Solution
It’s no secret that collecting
accounts receivable has its fair share of unique challenges. However, overcoming these challenges becomes
systematic once you’ve found an effective method to track the metrics and
implement collection strategies. One proven method is the use of an accounts
receivable management and credit collections system. This system should
organize, categorize, and report the data so that tracking DSO, aging invoices
and high-risk clients is automatic. With a system in place, you can be
proactive in your collections process and improve cash flow. You will no longer
need to ask: What invoices are late and how much money is owed by aging
category? How often are customers contacted directly about unpaid invoices?
What percentages of your customers pay on time?
On top of providing accounts
receivable metrics for analysis, a collections system should offer tools to
automate mundane tasks. These tools within the system automatically highlight
the accounts that need attention and schedule reminders, letters and calls for
those accounts. Sometimes the reactive approach to managing accounts receivable
just doesn’t cut it. Being proactive
with your collections process will allow you to see improvements in your cash
flow.
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