The right accounts receivable performance metrics, or KPIs, ensure you measure what matters most to your company.
What are Accounts Receivable (AR) KPIs?
Accounts receivable management requires a clear view of the invoice-to-cash process to remain efficient and adaptable. For that reason, understanding the right accounts receivable metrics, or key performance indicators (KPIs), to monitor can help you better understand the strengths and limitations of your current AR strategy.
What is Accounts Receivable Tracking?
Simply put, accounts receivable tracking is the process by which businesses monitor how much cash flow is tied up in unpaid client invoices. Traditionally, most finance professionals track AR manually, through a spreadsheet, with accounting software, or with a combination of all three. By monitoring the right KPIs, organizations gain insight into AR performance and potential bottlenecks.
Accounts Receivable Performance Metrics
The most common accounts receivable metrics tend to be day sales outstanding (DSO), average days delinquent (ADD), and bad debt ratio. Some finance departments may also regularly calculate more sophisticated metrics like accounts receivable turnover ratio or collections cost.
To help you identify the most important metrics for your organization, we've curated a list of helpful measurements for efficient AR management.
- Day Sales Outstanding (DSO)
Your DSO is how quickly (or slowly) you get paid. The lower your DSO, the faster you are receiving payments. Higher DSO indicates significant bottlenecks in either payment methods or collections strategy. The formula to calculate DSO is:
DSO = (accounts receivable/total credit sales) * the number of days
- Average Days Delinquent (ADD)
This metric highlights how many days it takes to get paid versus how long it should take. This metric becomes useful for AR professionals looking for ways to identify potential bad debt.
ADD = regular DSO - best possible DSO
- Collections Effectiveness Index (CEI)
This percentage highlights how efficiently you collect payments.
CEI = Number of delinquent accounts/number of current accounts receivable
- Accounts Receivable Turnover (ART)
Unlike CEI or DSO, the accounts receivable turnover ratio doesn’t just highlight how long it takes to get paid. It establishes a company’s effectiveness in collecting accounts receivable.
ART = net credit sales / average accounts receivable
- Bad debt to sales
Also called the write-off rate, this metric reveals the number of accounts receivable that cannot be collected and can indicate a need to more closely monitor the extension of credit to customers.
Bad debt = (Uncollected sales/yearly sales) x 100
- Collection cost
For this metric, you’ll want to add all the expenses related to collecting payments, including hiring collections agencies. This gives you insight into whether your processes and technology are cost-efficient.
Collection cost = Expenses/Payments x 100
- Right party contracted (RPC) rate
Not sure if you’re reaching the right people when sending invoices? This rate calculates what percentage of your payment communications are going to the right contact.
RPC percentage = Number of right contacts reached / Total number of communication attempted x 100
- Number of revised invoices
Finally, keeping track of how many invoices required revisions can help finance teams to identify issues with the invoicing process.
Monitor Your Accounts Receivables with Invoiced
At Invoiced, our accounts receivables KPI dashboard can show you where you stand at a glance. Our comprehensive tracking makes reviewing AR metrics a cinch, from pre-built reports to collection forecasting and multi-entity reporting.
Check out our full suite of enhanced analytics tools for more.