Accounts Receivable Analytics: The Key Metrics Every Business Should Monitor
Nov 26, 2023
In today's competitive business landscape, mastering Accounts Receivable metrics and leveraging AR analytics is paramount. For companies aiming to maintain financial health, it's not just about tracking money owed, but also interpreting and strategically using this data. Here, we unveil the pivotal AR metrics every business should prioritize.
1. Days Sales Outstanding (DSO):
Definition: Often the first metric companies delve into when diving into AR analytics, DSO calculates the average days taken to collect payment post-sale.
Significance: A high DSO can reveal inefficiencies in the B2B collection process or overly lenient terms. In contrast, a low DSO indicates swift payment habits or an efficient collections team.
Leveraging the Data: Regularly benchmark your DSO against industry standards. Elevated figures may require revisiting credit policies or collection strategies. Calculate your DSO today and see how compare to industry benchmarks using our free DSO calculator: https://tools.uselevers.com/
2. Accounts Receivable Turnover:
Definition: This AR turnover rate metric shows how often a business converts its receivables into cash within a specific period.
Significance: A high turnover rate suggests effective credit policies and prompt invoice payments. Conversely, a lower rate can indicate potential collection process issues.
Leveraging the Data: Observe turnover trends. A dip suggests it's time to reassess customer creditworthiness or collection techniques.
3. Percentage of Outstanding Receivables:
Definition: This metric identifies the percentage of AR balances that are overdue, categorized by 30, 60, or 90 days.
Significance: An increasing percentage in older categories is an early alert to collection concerns or looming bad debts.
Leveraging the Data: Prioritize collections based on age, focusing first on the oldest balances.
4. Percentage of Outstanding Receivables:
Definition: This metric identifies the percentage of AR balances that fall into various age categories, such as 30, 60, or 90 days overdue.
Significance: An increasing percentage in older categories can be an early warning sign of collection issues or potential bad debts.
Leveraging the Data: Businesses should prioritize collections based on aging categories, directing efforts first toward the oldest outstanding balances.
5. Collection Effectiveness Index (CEI):
Definition: CEI measures a company's ability to collect funds during a given period.
Significance: A CEI near 100% indicates optimal collections, while a declining CEI may pinpoint procedural inefficiencies or a change in client payment behavior.
Leveraging the Data: Analyze any departures from the norm. If CEI drops, dig deeper into individual client behaviors and adjust collection strategies accordingly.
6. Bad Debt to Sales Ratio:
Definition: This metric calculates the percentage of bad debts (uncollectible receivables) relative to total sales.
Significance: A rising ratio can be indicative of credit policies that are too lenient or an inadequate assessment of client creditworthiness.
Leveraging the Data: Use this ratio to fine-tune credit-granting decisions. It might be wise to reevaluate credit terms or initiate more stringent pre-sale credit checks.
These best AR metrics to track offer businesses a clearer financial landscape and propel informed decision-making. They're more than mere data; they serve as a roadmap toward superior financial practices and a robust bottom line.