If you don’t set benchmarks, how can you measure your performance? How do you know if you’re performing well or if you need to pull up your socks?
Key measurements are a vital part of any functioning business unit. Accounts receivable is no different. Yet there are many measures available, all which claim to provide insight into your processes. Which ones do you really need?
Average Collection Period Ratio
To understand your accounts receivable and measure performance, one of the key metrics you should look at is your average collection period ratio. This measure gives you the average number of days it takes to collect on an account, from invoice to payment.
Why is it important? Essentially, the average collection period ratio tells you how quickly you collect your accounts. While it is an average, it tells you both how soon your customers pay you and how quickly you turn accounts in cash.
The usefulness of this should be clear. You can see if your customers, on average, pay you in advance of their due dates or if they’re letting their bill payments slide. Establish a benchmark to work toward.
Account Turnover Ratio
Another good benchmark is the accounts receivable turnover ratio. This measure tells you how often you collect accounts during a particular period, whether it’s a month or a year.
Why do you need to know how often you collect accounts? It goes hand in hand with the average collection period ratio in telling you how effective your collections process is. If your accounts are collected on a frequent basis, your customers are likely paying on time and you’re turning accounts receivable into cash. If your accounts aren’t being collected often enough, you could run into cash flow problems.
Analyzing this measure and setting a benchmark for performance can help you better perform in managing your debts and cash flows.
Average Number of Days Delinquent
This measurement informs you about overdue accounts. It illustrates, on average, how long an account is overdue. This measure gives you good insight into how effective your collections process is.
The longer accounts stay overdue, the less efficient your team is at performing collections. Set a benchmark for performance here and measure against it. Seek to reduce the number of days accounts stay delinquent.
Collection Effectiveness Index
The collection effectiveness index (CEI) is another good measurement to keep an eye on if you want an indication of how well your team is performing. At its core, the CEI is a comparison of how much money your business is owed, to how much you actually collect over a given time period.
The closer the amount you collected was to the amount you were owed, the better your accounts receivable team is performing.
Mistakes in accounts receivable can be costly. Keep an eye on the percentage of accounts processed error-free on the first try to get an idea of how well you’re performing in this arena.
Of course, the higher the percentage of accounts you process correctly on the first try, the better your performance. A low percentage here indicates your team is making many errors. You’ll need to make some changes. What can you do to reduce the number of errors and make their jobs easier?
Measure What Matters
These are just a handful of the key benchmarks you should track when you want to know how well your accounts receivable team is performing. Remember to track what matters to you as a company so you can deliver the best possible service to your customers.