Your company is booming, sales are up, and you're feeling pretty good. But then you look at your bank account, and it's not quite reflecting the success you see on paper. Where’s the disconnect? It often lies in accounts receivable. Getting paid, and getting paid on time, is crucial for a healthy business.
To really understand what's happening with your incoming cash, you need to track the right Key performance indicators (KPIs). This guide won't just list AR KPIs — it will show you how to calculate them, what they mean for your business, realistic goals, and how to improve them, especially with the power of automation.
What are accounts receivable KPIs?
Accounts receivable key performance metrics, or KPIs, are performance metrics used to track the success of your accounts receivable team or process. Firstly, accounts receivable is defined as the money owed to a company, for the products or services it has provided, that have not yet been paid.
Tracking key KPIs is important for understanding and improving your company's accounts receivables process and cash flow. By monitoring the following metrics, you will be able to:
- Measure how quickly customers are paying their bills
- Identify problem areas with customer payments
- Evaluate the effectiveness of your accounts receivable process
- Assist your accounts receivables team in improving their efficiency (your sales team uses KPIs and targets, there's no reason your AR team shouldn't as well)
If the company offers credit sales to its B2B or B2C clients, measuring accounts receivable performance levels will ultimately protect the company's cash flow while simultaneously promoting more accurate financial forecasting relating to the company's AR turnover ratio.
What does a strong accounts receivable performance look like?
Before looking at different accounts receivable KPIs, you must ask what indicates a strong AR performance. The individual key metrics will provide further insight into the team's performance.
However, general objectives should include:
- Gaining fast cash collections, not least because accounts receivable are considered a current asset and should be collected quickly.
- Achieving optimized financial returns, which is characteriz by minimal bad debts and write-offs.
- Ensuring good communication, the key to resolving disputes, between the AR team and all relevant credit clients.
A strong AR performance will boost your bottom line, cash flow, and time management. Tracking the right accounts receivable KPIs will lead you to the desired results.
Why are accounts receivable KPIs important?
Accounts receivable KPIs are important for several key reasons that contribute to the financial health and operational efficiency of a business.
Improve cash flow: predict and accelerate income
Tracking KPIs allows a business to predict when payments are due and identify potential delays. By proactively managing accounts receivable, a business can accelerate incoming cash, ensuring there's sufficient liquidity for ongoing operations and investments.
Reduce bad debt: identify risks early
Analyzing KPIs like days sales outstanding (DSO) and collection effectiveness index helps identify customers who are consistently late or at high risk of defaulting. This early identification allows for timely intervention, reducing the chances of bad debt and improving overall financial stability.
Improve efficiency: see where your team's time goes and how to optimize it
KPIs provide insights into the efficiency of the accounts receivable process. By tracking metrics like the average time to process invoices and the number of disputed invoices, a business can pinpoint bottlenecks and optimize workflows. This optimization can lead to better resource allocation and improved team productivity.
Make smarter decisions: inform credit policies and growth strategies
Data derived from AR KPIs can inform decisions related to credit policies, sales strategies, and growth initiatives. Understanding customer payment patterns can help in setting credit limits and terms, while insights into industry benchmarks can guide strategic planning.
Enhance customer relationships: identify and fix friction points in billing
Monitoring metrics like the number of billing disputes and customer payment behavior can highlight areas where customers are experiencing friction. By addressing these issues, such as unclear invoices or inconvenient payment methods, a business can enhance customer satisfaction and strengthen relationships.
10 must-track accounts receivable KPIs
To effectively manage your accounts receivable and ensure a healthy cash flow, tracking the right Key Performance Indicators (KPIs) is essential. Here are ten critical KPIs every business should monitor to gain valuable insights and optimize their financial processes.
Days sales outstanding (DSO)
- What it is: Average days to collect after a sale
- Why it matters for: Direct link to cash in the bank
- How to calculate: (Accounts receivable / Total credit sales) × Number of days
- Goal/benchmark: Aiming for <45 days is often healthy, but it varies
- How to improve it:
- Automate payment reminders: Use Chaser to send timely, personalized follow-ups without manual effort
- Offer online payments: Make it easy for customers to pay instantly using Chaser Pay
- Clear invoice terms: Ensure clarity
- Proactive credit checks: Use data to inform terms with Chaser payer rating
Average days delinquent
- What it is: Average days invoices are past due
- Why it matters for: Pinpoints the lateness problem
- How to calculate: ADD = regular DSO - best possible DSO
- Goal/benchmark: As low as possible
- How to improve it:
- Escalate reminders: Use Chaser for automated, escalating reminder schedules
- Implement late fees (carefully): If appropriate
- Improve communication: Ensure customers know due dates
Accounts receivable turnover ratio (ART)
- What it is: Measures how efficiently a company collects its receivables.
- Why it matters: Indicates how quickly you're turning sales into cash.
- How to calculate: Net credit sales / Average accounts receivable
- Goal/benchmark: Higher is generally better; depends on industry.
- How to improve it:
- Tighten credit policies
- Offer early payment discounts
- Streamline billing processes
Collections effectiveness index (CEI)
- What it is: Percentage of receivables collected in a given period.
- Why it matters: Shows the effectiveness of collection efforts.
- How to calculate: (Amount collected / (Beginning AR + Credit sales - Ending AR)) x 100%
- Goal/benchmark: Close to 100% is ideal.
- How to improve it:
- Implement consistent follow-up
- Use collection software like Chaser
- Monitor and address problem accounts promptly
Bad debt to sales ratio
- What it is: Percentage of sales that become uncollectible.
- Why it matters for: Shows the level of risk in credit policies.
- How to calculate: Bad debt expense / Total credit sales
- Goal/benchmark: As low as possible.
- How to improve it:
- Perform thorough credit checks use Chaser
- Set credit limits
- Review and update credit policies regularly
Write-off ratio
- What it is: Percentage of accounts receivable written off as uncollectible.
- Why it matters: Indicates potential issues in credit evaluation and collection.
- How to calculate: Value of accounts written off / Total accounts receivable
- Goal/benchmark: As low as possible.
- How to improve it:
- Improve collection processes
- Enhance credit assessment procedures
- Monitor and address aging receivables promptly
Right Party Contacted (RPC) rate
- What it is: Percentage of contacts where you speak to the correct decision-maker.
- Why it matters: Saves time and increases collection efficiency.
- How to calculate: Number of successful right party contacts / Total contact attempts
- Goal/benchmark: Higher is better.
- How to improve it:
- Verify contact information regularly
- Train staff on effective communication
- Use updated customer databases
Operational Cost per Collection
- What it is: Cost incurred to collect each payment.
- Why it matters: Helps optimize collection processes and reduce expenses.
- How to calculate: Total collection costs / Number of collections
- Goal/benchmark: As low as possible.
- How to improve it:
- Automate collection processes
- Use efficient software solutions
- Streamline workflows and reduce manual work
Deduction Days Outstanding (DDO)
- What it is: Average time it takes to resolve deductions taken by customers.
- Why it matters: Affects cash flow and reconciliation processes.
- How to calculate: Average time to resolve deductions
- Goal/benchmark: As low as possible.
- How to improve it:
- Implement a system for tracking deductions
- Communicate with customers about deduction policies
- Resolve deductions promptly
Number of revised invoices
- What it is: Number of invoices that need to be corrected and reissued.
- Why it matters: Indicates accuracy and efficiency of the billing process.
- How to calculate: Total number of revised invoices
- Goal/benchmark: As low as possible.
- How to improve it:
- Improve data entry accuracy
- Implement invoice review procedures
- Provide training on invoice creation
Setting up accounts receivable KPIs
To effectively manage your accounts receivable, you need to track key performance indicators (KPIs). Here's a "how-to" guide on where you can find and track this crucial data using different tools:
1. Spreadsheets (Free downloadable KPI tracker)
- Where to find the data: You'll need to manually export or input data from your invoices, payment records, and customer accounts. This information is typically found in your accounting system or individual transaction records.
- How to track:
- Create a custom spreadsheet: Set up columns for relevant data points such as invoice number, customer name, due date, amount, payment date, and any other information needed for your chosen KPIs (e.g., Days sales outstanding, collection effectiveness index).
- Use a free downloadable KPI tracker: Many websites offer pre-built spreadsheet templates for AR KPI tracking. Search online for "accounts receivable KPI tracker spreadsheet" to find suitable options.
- Manual data entry: This method requires consistent manual input of data from your source systems. Be diligent to avoid errors.
- Formulas: Utilize spreadsheet formulas (e.g., SUM, AVERAGE, IF) to calculate your KPIs based on the raw data you've entered.
Advantages |
Disadvantages |
Free or low-cost |
Requires manual data entry, which can be time-consuming and prone to errors |
Customizable to your specific needs |
Limited automation and reporting capabilities |
Can be a good starting point |
Difficult to scale as your business grows |
Easy to use and access |
Limited insights and may lead to data analysis challenges |
2. Accounting software
- Where to find the data: Your accounting software (e.g., QuickBooks, Xero, Sage) is the primary source of your financial data, including invoices, payments, and customer balances.
- How to track:
- Built-in reports: Most accounting software has pre-defined reports for accounts receivable, such as aging reports, customer statements, and sales summaries. These reports often contain the raw data you need to calculate KPIs.
- Customizable reports: Many platforms allow you to create custom reports by selecting specific data fields. Explore your software's reporting features to tailor reports to your KPI needs.
- Basic KPI tracking: While not always explicit KPI dashboards, you can often infer or calculate basic KPIs directly from the provided reports (e.g., view total outstanding invoices to calculate DSO).
- Integration with BI tools: Some accounting software can integrate with business intelligence (BI) tools, allowing for more advanced data visualization and KPI tracking.
Advantages |
Disadvantages |
Integrates with your financial data |
May not offer detailed analysis or specialized AR KPIs |
Provides real-time data updates |
Reporting features can be limited and not customizable enough |
Automates some data entry processes |
May require additional setup for advanced KPI tracking |
Generally comes with existing subscription for users |
May need additional training to use reporting effectively |
3. Specialized accounts receivable software (e.g., Chaser)
- Where to find the data: Specialized AR software integrates directly with your existing accounting system (e.g., ERP, general ledger). This means it pulls the necessary invoice and payment data automatically.
- How to track:
- Automated KPI dashboards: These systems are designed to provide real-time, in-depth KPI tracking. You'll find dedicated dashboards displaying metrics like Days sales outstanding (DSO), average days delinquent (ADD), collection effectiveness index (CEI), and more.
- Pre-built reports: Specialized AR software offers a wide range of pre-built reports specifically for accounts receivable analysis. These reports often present KPIs in an easily digestible format.
- Forecasting and insights: Many of these tools use your data to provide forecasts and insights into future cash flow and potential bad debt, going beyond simple tracking.
- Automated reminders and follow-ups: Beyond tracking, these systems also automate collection efforts, directly impacting your KPIs.
Advantages |
Disadvantages |
In-depth KPI tracking and analysis |
May require a subscription fee |
Automates reminders, follow-ups, and reporting |
Requires initial setup and integration |
Provides detailed insights and forecasts |
May require training for your team to fully utilize features |
Enhances efficiency and reduces manual work |
May not be ideal for very small businesses with simple AR needs |
Importance of regular (weekly/monthly) reviews
No matter which method you choose, consistent review of your accounts receivable KPIs is crucial.
- Weekly reviews: Focus on short-term trends and immediate issues.
- Check for overdue invoices and follow up promptly.
- Review collection efforts and track progress.
- Identify any sudden spikes or drops in key metrics.
- Monthly reviews: Provide a broader view for strategic planning.
- Analyze trends over time and identify patterns.
- Compare actual performance against your goals.
- Adjust strategies and processes as needed.
- Report your findings to stakeholders.
By consistently reviewing your AR KPIs, you can maintain healthy cash flow, reduce bad debt, and optimize your collection processes.
Automate your whole accounts receivable process
Simply monitoring accounts receivable KPIs provides valuable insights, but true efficiency and impact come from automation. Automating your AR process can significantly streamline operations, reduce errors, and enhance your overall financial health. Let's explore how automation can transform your approach to accounts receivable management.
Reduce Days sales Outstanding (DSO)
Automated reminders significantly reduce DSO by ensuring invoices are consistently followed up. Instead of manually tracking and sending reminders, an automated system sends timely, personalized reminders at preset intervals. This proactive approach prompts customers to pay on time, reducing the average number of days it takes to collect payments and improving cash flow.
Improve Collections Effectiveness Index and Average Days Delinquent
Focused, consistent follow-up, as facilitated by automation, directly improves CEI and ADD. By automating reminder schedules with escalating steps for overdue invoices, a business can ensure no invoice slips through the cracks.
Consistent follow-ups prompt payment and address delinquencies swiftly. Automated systems also track interactions and provide data on payment patterns, enabling better management of overdue accounts and increasing collection effectiveness.
Improve team productivity
Automation frees up staff from manual chasing, enabling them to focus on more strategic work. Without automation, accounts receivable staff spend considerable time manually tracking invoices, sending reminders, and updating records.
Automation eliminates these tedious tasks, allowing staff to dedicate their time to analyzing financial data, improving credit policies, and building better customer relationships. This shift improves overall productivity and job satisfaction.
Gain insights
Chaser reporting and dashboard features provide valuable insights into accounts receivable performance. The platform offers real-time dashboards displaying key KPIs, such as DSO, CEI, and ADD.
Detailed reports offer insights into customer payment behaviors, overdue invoices, and collection efforts. This data empowers businesses to make informed decisions, identify bottlenecks, and optimize their accounts receivable processes.
Integrate seamlessly
Chaser integrates seamlessly with existing accounting software, ensuring smooth data flow and accurate reporting. The integration eliminates manual data entry and reduces errors. Data from the accounting software, such as invoices and customer information, is automatically synced with Chaser, allowing for efficient and accurate automation of reminders and tracking of payments. This integration simplifies the process and ensures all systems work together seamlessly.
Final thoughts
Tracking and improving accounts receivable KPIs is essential for businesses to maintain healthy cash flow and improve operational efficiency. By monitoring metrics like days sales outstanding, collection effectiveness index, and bad debt to sales ratio, businesses can predict income, reduce bad debt, and make data-driven decisions.
Automation is not just a convenience but a powerful tool to achieve AR excellence. Automating processes such as reminders, follow-ups, and reporting streamlines operations, reduces errors, and frees up staff to focus on strategic tasks, directly improving key metrics, enhancing team productivity, and providing valuable insights for continuous improvement.
Ready to experience the power of automation firsthand? Take the next step in optimizing your accounts receivable process by trying Chaser auto-call feature for free for 10 days. Discover how automated, personalized call reminders can further reduce your DSO and improve collection rates, complementing your existing automated email reminders.
Ready to take control of your cash flow? Download our free, easy-to-use accounts receivable KPI Tracker spreadsheet and start monitoring your key metrics today. Gain valuable insights into your business's financial health and identify areas for improvement.
FAQs
While it varies, key AR KPIs often include:
- Days Sales Outstanding (DSO): Lower indicates faster payment collection.
- Accounts Receivable Turnover Ratio: Higher suggests efficient conversion of credit sales to cash.
- Collection Effectiveness Index (CEI): Higher signifies effective collection efforts.
At least monthly is common. More frequent tracking may benefit businesses with high transaction volumes or longer credit cycles. Regular tracking allows for timely issue identification.
Research industry averages and analyze competitors. Consider payment terms and economic conditions. Focus on your DSO trend over time. Optimize for cash flow while maintaining customer relationships.
The CEI formula is:
CEI = (Total Collected + Ending AR) / (Beginning AR + Total Credit Sales) * 100%
Accounting software often automates this calculation. A higher CEI indicates more effective collections.