What Are Accounts Receivable Metrics? Define Their Types

What Are Accounts Receivable KPIs?

Account receivable is money that the company pays for the offered service and product. However, this is unpaid money. In simple words, this is unpaid money due from the client’s end after availing of the service or buying the product.

Top accounts receivable KPIs are some metrics that offer a clear picture of a company’s liquidity. The account team or other high authorities can track these metrics to identify the following options –

• Determine the issues related to customer average payments
• Measure the rate of customers’ payment
• Evaluate the effectiveness of the accounts receivable process

13 Accounts Receivable Metrics to Consider

1. Days Sales Outstanding (DSO)

DSO analyzes and measures the rate at which your customers are paying their bills. Divide the total accounts receivable balance by the average daily sales revenue. A low DSO shows a better performance.

DSO Formula –

DSO = Accounts Receivable / Total Credit Sales x Number of Days

Calculating DSO is beneficial to track issues related to the accounts receivable process. You must maintain the DSO rate as low as possible. A high DSO represents on time collection of the cash.

Let us understand DSO through an example. Suppose your company has a receivable balance of $6,000 per month. The total sales revenue in the month is $20,000. The DSO will be as follows –

6,000/20,000 x 30 = 9

So the day’s sale outstanding is 9.

2. Average Days Delinquent (ADD)

This accounts receivable metric indicates the average number of days your client takes to make the payment.
ADD is useful for determining bad debt. It also improves accounts receivable operations. This AR metric is crucial and should not be ignored at any cost. Otherwise, your business finances will be badly affected. So, you need to track this metric carefully.

ADD Formula –

ADD = Regular DSO – Best possible DSO

Let’s take an example. If the regular DSO of your company is 30 days and the best possible DSO is 20 days, then ADD is 10 days.

ADD = 30 – 20 = 10

This indicates it takes 10 days for customers to pay for their invoices.

3. Collection Effectiveness Index (CEI)

This AR metric shows the effectiveness index of collecting money. It is also connected to the financial losses provoked from bad debts. It is also related to the financial losses. An 80% or over CEI is considered the best one.

CEI is calculated by dividing the number of overdue accounts by the total number of active accounts receivable.

CEI Formula –

CEI = (Beginning A/R + monthly credit sales – ending total A/R) / (all beginning receivables + monthly credit sales – ending current receivable) x 100

Let’s take an example of your company which has the following figures

• Beginning A/R of $200,000
• Monthly credit sales of $400,000.
• Ending total A/R of $140,000
• Ending current AR of $120,000

Then, according to the formula

CEI = $200,000 + $400,000 – $140,000/ $200,000 + $400,000 – $120,000 x 100

CEI = $460,000/ $480,000 x 100 = 95%

A CEI of 80% is considered good, so 95% is a good CEI for your company.

4. Aging Reports

Aging reports are important financial documents that represent the outstanding invoices of a company. These outstanding invoices are categorized by the time they have been overdue. Therefore, businesses can track these unpaid invoices easily. Ultimately, this accounts receivable metrics report helps to manage cash flow, estimate bad debt, and create a strategy for better credit and collections processes.

Some key components of aging reports are as follows –

1. Name of the customer
2. Invoice date
3. Amount of invoice
4. Payment terms
5. Aging Buckets (based on how many days overdue the invoices are) Some aging buckets are as follows –

• 0 to 30 days – invoices still within the agreed payment terms
• 31 to 60 days – invoices that are 1 to 30 days overdue
• 61 to 90 days – invoices that are overdue from 31 to 60 days
• 91+ days – invoices overdue by more than 60 days

5. Bad Debt to Sales Ratio

This is another accounts receivable metric, crucial for business professionals. The bad debt to sales ratio analyzes bad debt in percentage form. Bad debts are very dangerous and your company should look for a solution to minimize them. So a company must observe and measure this metric.

Bad Debt to Sales Ratio Formula –

Uncollected Sales/ Annual Sales x 100

Suppose your company has annual total sales of $1,00,000 and uncollected sales of $50,000 then the bad debt to sales ratio is as follows –

Bad Debt to Sales Ratio = $50,000 / $1,00,000 x 100

Bad Debt to Sales Ratio = 50%

A good bad debt to sales ratio is below 15% whereas if it is above 25%, it is considered to be poor.

6. Average Collection Period

The average collection period is a measure that indicates how long, on average, it takes a company to receive payment after making a sale. You might think it is similar to DSO, but it is not identical.

Average Collection Period Formula –

Average Collection Period = (Account Receivable / Annual Credit Sales) x 365

Like DSO, an average collection period should also be low. It’s because a low average collection period indicates a quick cash recovery. Additionally, companies should also focus on sales while collecting payments on time.

Let’s take accounts receivable metrics example to understand it, suppose a company has following figures –

• Account receivable – $1,000
• Annual credit sales – $2,000

Average collection period 1,000/2,000 x 365 = 182.5

7. Accounts Receivable Turnover Ratio (ART)

This kind of AR metric indicates at what rate the Accounts Receivable department is collecting payments and converting it into cash. You can obtain the accounts receivable turnover (ART) ratio by dividing the net sales by the average accounts receivable.

Accounts Receivable Turnover Ratio Formula –

ART = Net Credit Sales/ Average Accounts Receivable

Average Accounts Receivable = Beginning Accounts Receivable + Ending Accounts Receivable/2

Suppose a company has following metrics –

Net Credit Sales – $500,000
Beginning Accounts Receivable – $50,000
Ending Accounts Receivable – $110,000

Average account receivable = $50,000 + $110,000 = $80,000

ART = $500,000/$80,000 = 6.25

A high ART indicates good output. It means that if the ART rate is high, your company is rapidly getting on-time payments with no delay. If this is low, it indicates an unsatisfactory mark on collecting payments.

8. Percentage of Receivables Current

Percentage of receivable current shows the proportion of the company’s accounts receivable that are within the standard payment terms and not past due. It shows whether the customers are paying on time or not.

Percentage of Receivables Current Formula –

Percentage of Receivables Current = Current Receivables/ Total receivables x 100

Current Receivables – The amount which is still within the agreeable payment terms (within 30 days)

Total Receivables – The total amount of outstanding receivables (current + overdue)

Suppose a company has following figures –

Total receivables – $200,000
Total current receivables – $150,000

Then according to the formula –

Percentage of Receivables Current = 150,000/200,000 x 100

= 75%

A higher percentage is ideal because it indicates the majority of receivables are being paid on time.

9. Overdue Receivables as a Percentage of Total Receivables

This is another AR metric that measures the proportion of a company’s accounts receivable that are overdue. One can evaluate the effectiveness of a company’s credit management through the percentage of overdue receivables to total receivables.

Overdue Receivables Percentage Formula –

Overdue Receivables Percentage = Overdue Receivables / Total Receivables x 100

Overdue Receivables = Amount which is past due and not collected yet

Total Receivables = Total outstanding accounts receivable that include current and overdue amounts.

Suppose your company has following figures –

• Total accounts receivable – $100,000
• Total overdue receivables – $40,000

Overdue receivables percentage will be – $40,000/100,000 x 100 = 40%

10. Dispute Resolution Time

From the name itself, you can predict that it is a time related to a dispute. It is the time invested in resolving conflicts by companies. This metric is important for business because it compels professionals to reduce time as much as possible. This is because unsolved disputes delay payment.

While reducing dispute resolution time, companies can refine their financial performance and maintain proper flow.

Dispute Resolution Time formula –

Average Dispute Resolution Time – Total Time Spent on Disputes/Total Number of Disputes Resolved

Suppose you are running and managing a company that has the following metrics –

Total time spent on disputes – 200 hours
Total number of disputes resolved – 40

Average dispute resolution time = 200 hours / 40 = 5 hours

11. First-Time Invoice Accuracy Rate

First-time invoice accuracy rate metric measures the percentage of invoices. It also reflects the accuracy and effectiveness of the company’s invoicing process. Also, it impacts customer satisfaction and the company’s cash flow.

First-time Invoice Accuracy Rate Formula –

First-time Invoice Accuracy Rate = (Number of Correct Invoices on First Issue/Total Number of Invoices Issued) x 100

For example, suppose your company issues 300 invoices in a month. Out of it, 250 were accepted because there were no issues in those invoices. While on the other hand, 50 invoices were under dispute due to mistakes.

So according to formula, the first time invoice accuracy rate is as follows –

250/300 x 100 = 83%

A high accuracy rate is a good indicator so 83% is a good accuracy rate.

12. Cost of AR per Invoice

The cost of AR per invoice refers to the cost of processing and meaning of each invoice in a company. It includes all expenses from the initial step of creating an invoice to the last receiving the payment after dispatching the invoice. This metric is crucial for determining areas of improvement in the payment flow.

Cost of AR per Invoice Formula –

Cost of AR per invoice = Total AR cost / Number of Invoices Processed

Lets understand the cost of AR per invoice through the example –

• Labor cost – $6,000
• Technology cost (AR software) – $1,000
• Collection cost – $1,200
• Overhead cost – $200

Total number of invoices processed – 100

Cost of AR per invoice = $6,000+ $1,000 + $1,200 + $200 / 100

= 84

13. Customer Satisfaction in Payment Experience

This measures how much customers are satisfied with the payment process for the goods and services they buy. So, when the customer is fully satisfied, it indicates there is a smooth and good payment process. On the other hand, there can be poor customer satisfaction if the payment process is long or getting unsuccess frequently.

There are multiple ways to refine customer satisfaction. You can offer multiple payment options and provide easy-to-use and secure payment processes. Also, it’s important to consider invoices along with their accuracy and understandability.

Value of Accounts Receivable KPIs

Accounts Receivables KPIs are vital for companies’ financial management. They help keep an eye on a company’s cash flow. With accurate data, it’s easy to determine the issues in the invoicing process. Apart from this, accounts receivable key performance indicators offer the following benefits.

Managing Credit Risk

Professionals can identify delayed payments through KPIs like Days Sales Outstanding (DSO). Hence, it’s easy for businesses to manage the credit risk.

Refine Collection Efficiency

The team can ensure that debts are effectively recovered through tracking of KPIs like the collection effectiveness index (CEI).

Profitability

It’s easy to maintain profitability by lowering DSO and maintaining higher collection rates. Businesses can ensure faster conversion of sales into cash.

Cash Flow Management

Payment delays are not good for any business. Regular analysis of accounts receivable KPIs is vitally important to maintain a proper cash flow. Ultimately, it helps in managing operational costs, employees’ wages, and suppliers’ on time payments.

Better Financial Prediction

Along with monitoring financial health, cash prediction for the future is easy with AR KPIs. This helps make better decisions on managing working capital, investment, and other financial management.

Our Ending Words

Maintaining a proper cash flow for any business and accounts receivable KPIs and metrics are helpful in this process. With better insight, it is also useful for professionals to make better decisions through better financial forecasting. Effective management of KPIs ultimately results in improved financial health for the business.

Frequently Asked Questions