In business, especially within the scope of accounts receivable (AR), tracking key performance indicators (KPIs) is crucial. Whether you're using debt collection software or a manual process, keeping a close eye on your financial metrics ensures healthy cash flow and the long-term stability of your company.
Not monitoring these metrics can cause serious issues down the road, such as delayed payments or even loss of valuable customers. Therefore, let’s dive into the top 5 accounts receivable KPIs every business should track, particularly when using debt collection software.
1. Days Sales Outstanding (DSO)
Days Sales Outstanding (DSO) is a widely recognized KPI that measures the average number of days it takes for a company to collect payments after a sale. Calculating DSO is crucial for understanding how efficient your company is at turning credit sales into cash.
Formula for DSO:
DSO = (Accounts Receivable / Total Credit Sales) x Number of Days
A high DSO signals delays in collecting payments, which can affect cash flow and working capital. A low DSO indicates quicker payments and healthier financial operations.
2. Collection Effectiveness Index (CEI)
The Collection Effectiveness Index (CEI) measures how successful your company is at recovering outstanding invoices within a given timeframe. This index gives a percentage that indicates how efficient your collections process is.
Formula for CEI:
(Beginning Receivables + Monthly Credit Sales – Ending Total Receivables) ÷ (Beginning Receivables + Monthly Credit Sales – Ending Current Receivables) x 100
While DSO focuses on the number of days it takes to collect payments, CEI measures the efficiency of the collection process itself. A CEI of 100% is ideal, but aiming for at least 80% indicates a strong collection process.
By integrating software for debt collection, businesses can improve the effectiveness of their collection processes, resulting in quicker debt recovery and improved financial health.
3. Average Days Delinquent (ADD)
Average Days Delinquent (ADD) tracks the number of days that payments are overdue beyond the agreed terms. A high ADD indicates poor payment practices, whereas a lower ADD means your customers are generally paying on time.
Formula for ADD:
ADD = DSO – Best Possible DSO
How Software Helps Lower ADD:
4. Accounts Receivable Turnover Ratio
The Accounts Receivable Turnover Ratio measures how often a company collects its receivables within a specific period, usually a year. A high turnover ratio means the company is collecting payments quickly, improving cash flow and reducing the risk of bad debts.
Accounts Receivable Turnover Ratio = Credit Sales / Average Accounts Receivable
A higher turnover ratio reflects efficient collection processes, while a lower one could indicate problems with credit policies or collections.
How Software Enhances Turnover Ratio:
By using the best debt collection software solution, businesses can optimize collections and increase their turnover ratio, leading to improved liquidity.
5. Best Possible DSO (BP-DSO)
The Best Possible DSO (BP-DSO) represents the ideal time frame for receiving payments, assuming all invoices are paid on time. While not always realistic, BP-DSO gives you a target to strive for and helps gauge the gap between actual and optimal performance.
Formula for BP-DSO:
(Current Accounts Receivable ÷ Billed Sales) x Number of Days
Conclusion: Tracking KPIs with Debt Collection Software
Keeping track of your accounts receivable KPIs is critical for maintaining your business’s financial performance. However, doing so manually can be overwhelming, especially as your business grows. The good news is, you don’t have to do it alone.
With the help of automated debt collection software like Maxyfi, you can track these KPIs in real time. The software not only provides a detailed dashboard to monitor DSO, CEI, ADD, and more, but it also streamlines workflows and automates collection efforts, allowing you to improve your cash flow effortlessly.
Whether you're a small business using debt collection software for small business, or a large enterprise seeking the best debt collection agency software, implementing the right tools can transform your collections process and help you stay on top of key financial metrics.
To learn more about how Maxyfi can help your business, stay tuned to our blog for more insights!