The final step in defining your accounts receivable management policies and procedures is measuring the results. In earlier blogs we talked about doing research to better understand what was working and what wasn’t working, and how to set goals to improve several of those areas. Credit and collections is a numbers game, and you can easily measure the results. Now let’s discuss several accounts receivable management KPIs (key performance indicators) that you may want to measure along with suggestions to continually improve on your business to business accounts receivable collections so you continue to reduce your bad debt and get paid faster and faster year by year.
Days Sales Outstanding (DSO)
Most businesses don’t know what days sales outstanding (DSO) is all about, but DSO is important because it helps them understand how long it’s taking them to get paid on their accounts receivable.
A company extending Net 30 Terms would ideally like to see their DSO at 30, but this is a bit misleading. There are reasons why you probably want DSO to be higher than your credit terms. For example, not all past due accounts receivable are bad. In tough economic times, or times when you have excess inventory or available service resources, you may want to extend payment terms or otherwise plan for extended credit terms. Take for instance a consulting firm that has a consultant on the bench with no billable work for them. They may approach a customer or prospect and offer them a discounted rate and extended terms if they sign a consulting contract now so that they have billable time for the consultant. It’s better for the company to take a calculated risk than to waste perishable time. In this case, the customer may still have NET 30 terms, but the company may extend 60 day terms on invoices for this particular project.
If you extend credit to customers you will inevitably end up with invoices in dispute. The key is to identify disputes earlier in the process, to define each one with a reason code, and to analyze disputes so you can do a root-cause analysis to prevent them from happening again. To measure your effectiveness you need to first understand how many invoices are in dispute. This can be difficult without a credit and collections system, but ask your collectors, and they should be able to provide a rough estimate. Next, track both the number of invoices in dispute and the value of disputed invoices over time. The goal should be to reduce both numbers as you gain more and more proficiency with your processes and/or your credit and collections system.
for more information on how to eliminate A/R disputes in your organization, download our guide here.