Key Performance Indicators in Accounts Receivable
Hi, my name is Adam Stewart, Debt Collection Expert and owner of Debt Recoveries Australia.
Debt is a normal part of doing business, but all companies should be able to manage their debt in order to function effectively.
Many times, the cash flow that a business has depends on how effectively it can collect cash from customers when it is due. Sometimes, the whole process of debt collection is hectic, and some businesses put it off until they need cash flow urgently. Unfortunately, the longer an invoice remains unpaid, the less likely it is to be paid.
Effective account receivable involves much more than making collection calls. The company must proactively identify its strengths and weaknesses, and use the tools available to help it manage its account receivables. The first step is learning more about the key performance indicators in account receivables, and what these indicators mean for the company’s bottom line.
Some of the KPIs and metrics business owners should be tracking include:
Days Sales Outstanding
This is the average collection period. It is used to measure how quickly a company is able to collect money owed to it after a sale has been completed. The lower the DSO, the better.
Reducing DSO is a challenging but important task for any company, as it ensures there is enough cash to reinvest in operations, sales and marketing. One of the ways to reduce DSO is to implement electronic invoicing and to send triggered reminders to clients to make outstanding payments.
Collection Effectiveness Index
This index compares how much money was owed to a company and how much it was able to collect within a certain time, usually a year. This performance indicator helps a company measure how strong its debt collection procedures and policies are, and whether it needs to make any changes.
Write offs occur when a company realizes it can no longer convert an account receivable into cash. This happens when collection efforts have stopped. The older the account, the less likely the business will receive payment without a lawsuit or help from a collection agency. It is important for the company to minimize write offs to improve cash flow.
Corporations can reduce credit risk by assessing the client’s portfolio and separating those who have a history of paying on time from those who are late payers. The company can then implement different limits and collection strategies for the late payers. Companies can request a client’s credit report to see their credit history and credit rating. They can use this information to create credit limits and terms for the client to reduce credit risks.
Collecting debts can be tough, but a company that uses the key performance indicators to manage and measure account receivables can increase cash flow and reduce write offs. For aging accounts, large corporations can outsource the debt collection task to a credible debt collection agency.
Debt Recoveries Australia works with ADC Legal Litigation Lawyers to provide debt recovery and legal services. By outsourcing debt collection, large companies are able to free up their time, resolve the problem quickly and increase their profitability. Contact Debt Recoveries Australia on 1300 799 511. You may also email at firstname.lastname@example.org or Skype at debtrecoveries.