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In this in-depth guide, we cover 11 of the best key performance indicators to use when measuring accounts receivable performance. Some you might already use every day and others you might have never thought to measure.
If cash is the fuel of your business, then your accounts receivable (AR) team are the ones stoking the flames.
To maximize accounts receivable performance, it’s essential that your AR team has a clear view into how the business is tracking on its collections and where there’s room for improvement. To do this, you need access to the right data and analytics—and more importantly, you need to know what to do with it.
No single key performance indicator (KPI) or metric will tell you the full story of how your collections efforts are performing. That’s why it’s beneficial to actively track several AR KPIs.
Having this data readily available will help you identify the strengths and weaknesses within your AR processes so you can make informed decisions that drive your business forward.
In this blog, we’ll cover the 11 most important accounts receivable KPIs to track. Click to jump to a section:
We recently surveyed—in partnership with SSON—103 Shared Services and Outsourcing (SSO), Global Business Services (GBS), and Finance leaders. Respondents were asked which metrics they prioritized for gauging AR performance. While their answers varied, respondents made it clear that maximizing AR performance requires a combination of elite efficiency, productivity, and customer service.
We’ll explain each of these key metrics that survey respondents prioritized, along with a few others.
Accounts receivable turnover ratio is a measure of how good your company is at collecting from its customers. It tells you the number of times during a given period (for instance, a month, quarter, or year) the company collected the average value of its receivables.
A higher number is preferable for AR turnover, as it indicates that your company is collecting on outstanding invoices quickly (the company collected on its average receivables more times in a given period).
The formula for AR turnover ratio looks like this:
To calculate your receivables turnover ratio, you’ll of course need to know what your net credit sales (the total number of sales you made to customers on credit terms, accounting for any returns or deductions) and average accounts receivable are for that given period.
Here’s how you can calculate those:
Let’s imagine your company’s annual credit sales are $90 million and your average accounts receivable for the year were $12 million.
After plugging these values into our AR turnover formula, this would give us an output of 7.5 (90 ÷ 12 = 7.5).
That means within this period (a year), you collected your average receivables 7.5 times. You can use this to approximate how long it takes your customers to pay you on average, which in this case would be about 49 days (365 days ÷ 7.5 = 48.6).
Companies need to be wise about who they’re extending credit to. The accounts receivable turnover ratio gives them a quick insight into whether they’re extending credit to the right people, and whether their collections team is doing a good job at pursuing overdue receivables.
Expected cash collections refers to the amount of cash a company can reasonably expect to have at a given time. There are two revenue sources that feed into this: your cash sales (where customers pay you right away) and your collections on accounts receivable (where customers pay you on credit).
To calculate your total expected cash collections, you’ll add the revenue you anticipate will come from cash sales to the revenue you anticipate will come from accounts receivable:
You can base your estimated cash sales on trends from previous years. But how do you go about forecasting which of your receivables you confidently expect to collect?
Let’s say your company expects to collect:
Now, let’s say your business has the following dollar amounts in outstanding receivables:
Assuming the rate of collections we mentioned earlier, you could estimate you’ll collect the following amounts:
Now imagine your company’s expected annual cash sales are $110,000. If we total the above forecasted collections from accounts receivable and add it to your expected cash sales, then your total expected cash collections would be $1,007,686 ($110,000 + $897,686).
Calculating your expected cash collections can help you better understand your current cash position and take necessary action early if you expect to be short on cash.
Average collection period refers to the number of days it takes your business on average to get paid after making a sale or delivering a service. You may also know this metric as days sales outstanding (DSO).
A low average collection period is ideal, as it means your AR team is collecting on outstanding receivables efficiently.
There are two ways you can calculate your average collection period:
Let’s say your company’s annual credit sales are $25 million and your current receivables total $3.5 million. These values would plug into our formula like this.
That means on average, it takes the company about 51 days to collect on receivables.
Your average collection period can help you understand many aspects of your business, the most immediate being your cash flow. If your average collection period is higher than you would like, this may signal challenges in unlocking working capital and make it difficult for the business to meet its financial obligations.
Days sales outstanding (also known as average collection period or days receivables) refers to the average number of days it takes for a company to get paid after making a sale on credit.
A low DSO number means it takes your company a reasonably short time to collect from customers, whereas a high DSO number means it takes your company longer to collect from customers.
To calculate your DSO for a given period (a single month for instance), you’ll need to know your total receivables and net credit sales for that period.
*Note that here we’re only interested in sales made on credit and not cash sales. It’s assumed that sales made on cash are collected upfront and have a DSO of 0 as a result.
Once you have these values, the formula to calculate DSO looks like this:
For businesses with seasonal sales or sales that fluctuate month-over-month, calculating your DSO over the course of a quarter instead of a month is a great way to normalize the data to see trends over time.
Let’s say you were calculating the company’s DSO for the first quarter of the year—January to March.
Now, let’s say your company had the following values:
These values would plug into our formula like this:
That means, it takes your business on average 51 days to collect receivables. In general, a DSO value below 45 days is considered good. But since DSO ranges vastly from industry to industry, it’s a good idea to see what’s “normal” for your area of business to put things into perspective.
Knowing how long it takes your company on average to receive customer payments will help you get a grasp of the status of your cash flow. Plus, not only can DSO tell you more about the effectiveness of your collections team, but it can also give you insight into customer creditworthiness and satisfaction.
The collection effectiveness index (CEI) refers to the percentage of its receivables a company has collected during a given period. Like the name suggests, this metric gives you an insight into how effective your company is at collecting its receivables. A high CEI is ideal, as it means you’ve successfully collected a higher proportion of your receivables.
CEI offers a different perspective for gauging the success of your collections efforts than DSO or average collection period. Whereas DSO measures success based on how fast you’re able to collect receivables, CEI measures success based on having as few uncollectible receivables as possible. One is a measurement of time while the other is a measurement of quality.
The formula for calculating collection effectiveness index looks like this:
Here’s what each of the inputs mean:
Let’s imagine your AR team wants to calculate the company’s collections effectiveness index over the course of a particular month and has the following values:
Those numbers would plug into our equation like this:
Ideally, you want a collection effectiveness index as close to 100% as possible, though achieving this is not realistic in most situations. Generally, a collection effectiveness index of 80% or above is considered “good.”
Examining your CEI output can help you determine if there are any snags in your invoice-to-cash process preventing you from getting paid. If your collections efforts are 68% effective as in the example above (a letter grade of D), then it signals to your team that there’s a problem in need of calibrating.
Average days delinquent (ADD)—sometimes referenced as delinquent days sales outstanding—refers to the average number of days your invoices are delinquent or past-due.
A higher ADD indicates that your customers are generally slow to pay. Conversely, a lower ADD indicates your customers pay you generally quickly.
Like with many of the other KPIs we cover here, however, a high or low output is subjective and should be interpreted in the context of how your competitors and others in the industry are performing.
To calculate average days delinquent, you must first calculate the following:
Once you have those values, you can calculate ADD with this formula:
Let’s say your business is making $80,000 in total net credit sales from January to March (90 days). Now, let’s say that over that same period, your total accounts receivable is $45,000.
Your DSO over the course of that period would be around 51 days ([45,000 ÷ 80,000] × 90 days = 51).
Now, let’s imagine your current accounts receivable are lower—say, $25,000. And, your annual credit sales are 6 times what you make in a quarter due to seasonality, in this case $480,000.
Your BPDSO would then be about 19 days ([25,000 ÷ 480,000] × 365 = 19.01)
These values would plug into our equation for ADD like this:
In this case, your average days delinquent would be 32.
Credit and collections teams often evaluate days sales outstanding, best possible days sales outstanding, and average days delinquent simultaneously to better understand how fast they’re able to convert invoices into cash.
Note that your DSO and ADD may or may not have similar trends. For example, an improvement in DSO could be reflective of modified credit terms you recently implemented or a shortened AR cycle. If ADD is simultaneously going up, this could simply be due to a seasonal spike in sales.
To get the full story of what your data tells you, it’s always important to examine trends over time and potential influencing factors.
Identify and interpret the data that really counts.
Number of revised invoices refers to the total number of invoices your AR team has had to revise over a particular period.
Your team might revise invoices for any number of reasons, be it a clerical error (such as listing an incorrect number of items) or an administrative adjustment (such as a change in payment terms).
Most often, an invoice is revised due to a customer disputing it. In these cases, the seller might issue a credit memo for billing corrections, which documents the reduced amount the customer owes.
Measuring your company’s number of revised invoices goes beyond looking at how many invoices you’ve had to correct over a specific period.
Issuing invoice revisions has implicit costs like the labor required to facilitate the changes, losses to staff productivity, and delayed payment speed.
For this reason, we recommend taking this metric a few steps further to get a more holistic picture of the impact revised invoices have on your collections process.
Beyond the sheer number of invoices your AR team has corrected, you should also estimate your team’s:
Once you’ve added up all of the above, you’ll likely arrive at a specific number of days. Next, add that value to your average collection period to predict when payment will be received after reissuing an invoice.
Why? Because you'll inevitably have customers that interpret an invoice revision to a resetting of payment term expectations.
Revising just one invoice can take substantial effort because your AR team must spend time investigating the cause of the dispute and evaluate whether you’ll provide a price reduction.
If your number of revised invoices is high, it could point to broader invoicing problems—like frequent errors from manual data entry—that might only be resolved by introducing AR automation.
Making sales on credit comes with a certain level of risk. Bad debt, which is when a buyer fails to pay their outstanding debt, is one such risk.
Bad debt is an amount that a business will write off as uncollectible. It’s categorized as an expense on a company’s balance sheet.
There are two ways you can recognize bad debt expense: the direct write-off method and the allowance method.
Under the direct write-off method, a bad debt is marked as an expense as soon as it appears that the amount will be uncollectible. The method is nice and simple because it requires no guessing about how much to expense.
The challenge with this method, however, is that under the Generally Accepted Accounting Principles (GAAP), an expense needs to be recorded in the same period as its corresponding revenue. This means you won’t be able to wait until you know for sure that a debt is uncollectible to write it off.
That’s why most businesses use the allowance method. Businesses use allowance for doubtful accounts to plan for the possibility of receivables being uncollectible before they know the actual value of the bad debt.
There are a few ways you can calculate bad debt through the allowance method:
*Based on data from previous years
To find your historical basis of percentage of sales estimated to be uncollectible, you can use bad debt to sales ratio: Bad Debt to Sales Ratio = (Actual Uncollectable Debts ÷ Sales per Period) x 100
Let’s say you’re using the aging schedule method to calculate your allowance for doubtful accounts, as it provides a slightly more accurate estimate than the other two methods we’ve mentioned above.
After analyzing your business’ finances from the last fiscal year, you found that:
Now, let’s assume your business currently has the following dollar amounts in outstanding receivables:
To estimate how much you’ll need to add to your ADA, you’ll calculate the following:
Next, you’ll add up your projected uncollectable debts for each aging category. This gives you a result of $321,433. This is your allowance for doubtful accounts.
Forecasting how much bad debt you can expect to have helps you plan and manage your cash flow better.
Percentage of high-risk accounts looks at the proportion of a business’ customers that might eventually contribute to bad debt.
Doing business with a higher percentage of high-risk customers can make it more difficult to reliably collect payment. Having too low a tolerance for risk, however, might have you at a disadvantage too, as it becomes difficult to grow revenue.
There is no standardized method of calculating your percentage of high-risk accounts. But, that doesn’t mean you can’t get a picture of which customers are unlikely to pay their debts on time.
The first step to calculating your percentage of high-risk accounts is to define what high-risk means to your specific business. And depending on your appetite for risk, this could vary significantly from business to business.
A general rule of thumb is that the longer a receivable remains unpaid, the higher its risk of becoming uncollectable. On average, it can take companies approximately 37 days to collect payments, however, that will vary depending on your industry.
Here are further steps you can take to build a general risk profile for evaluating customers:
With this framework in place, you can determine the percentage of your customers that could be deemed high-risk accounts (take the number of customers you deem to be “high-risk”, divide it by your total number of customers, then multiply this by 100).
Knowing which accounts are high-risk helps you know where to focus your collectors’ attentions in their efforts to prevent bad debt.
It also presents an opportunity for AR teams to strengthen customer relationships and contribute to their business’ overall customer experience objectives.
Rather than write off high-risk accounts right away, interact more purposefully with them. You might just gain a better appreciation for how your customers operate and turn them into more reliable paying clients.
There are many ways to gauge staff productivity. For instance, you might measure it based on the time it takes to complete a task or how many workers are required for a project.
The basic principle of productivity is to get the most units of output for your units of input. Ideal efficiency for the accounts receivable department is to maximize output (invoices sent, payments collected, payments applied to their respective invoices) with the lowest possible input (labor, capital, and materials).
Calculating productivity is deceptively simple. You can do so by dividing your units of output by your units of input:
Traditional AR processes, however, are marred by high degrees of manual work. Your AR staff might be putting in as much work as they reasonably can, but inefficient processes are slowing down their ability to complete important tasks.
Because of this, it’s more useful to calculate how much time your AR team spends completing tasks manually. You can still calculate your team’s level of output—just know that it won’t mean much if your staff is bogged down by inefficient processes.
Here are two ways you can estimate the degree to which your AR team is constrained by manual work:
This will provide you with a benchmark when introducing any level of automation into your AR processes, surfacing any gains you’ve made and validating your technology spend.
Enjoying high levels of productivity in accounts receivable means ensuring your AR staff have the right tools and processes in place to do their jobs efficiently. A rising tide lifts all boats, and this couldn’t be truer in the context of staff productivity. Higher staff productivity also equates to:
Customer satisfaction is a measure of how happy your customers are with your products, services and capabilities. In accounts receivable, customer satisfaction is a measure of how streamlined and convenient your customers’ billing and payment experience is.
There are a few ways a company might measure customer satisfaction, a primary one being the net promotor score (NPS). NPS is a metric based on how likely a customer is to recommend your company to a peer.
But whereas the NPS looks at the entirety of the customer experience, AR departments want to be able to gauge customer satisfaction within the billing and payment experience alone. There is unfortunately no standardized metric for this.
But, there are certainly criteria you can look at to arrive at a system of measurement yourself.
In our view, effective customer experience in accounts receivable depends on four things:
Consider giving your company a score (for instance, between one and ten) on each of these four criteria. This will help give you a clearer picture of how satisfied your customers are with the billing and payment experience you provide.
Understanding where barriers to payment exist and prioritizing customers’ experience at every interaction with your AR team will ensure higher levels of customer satisfaction.
The rationale for prioritizing customer experience is simple: happy customers will continue to buy from you and unhappy customers will take their business elsewhere.
The payment process is a particularly vulnerable point in the B2B customer journey, as finds a new Versapay report based on a survey of 1,000 c-level executives. 73% of respondents recognized that their invoice-to-cash cycle was a frequent source of negative customer experiences. 85% also reported that poor communication between AR teams and their customers has led to nonpayment.
By determining how satisfied your customers are with their billing and payment experience, you can see if there are areas where you need to make improvements.
While the metrics we’ve outlined above are some of the most common KPIs used by AR teams, there are of course others out there that a business might use to gauge performance.
You can use any combination of the KPIs we’ve outlined above to stay on top of your company’s cash position—and you certainly don’t have to track all of them. The key is to develop a system of reporting that fits with how your business operates.
For instance, while days sales outstanding is one of the primary metrics used to discuss AR performance (and the most favored by respondents of Versapay and SSON’s AR Pulse Check survey), it doesn’t work for every business. Commercial real estate (CRE) firms don’t make sales; they collect rent. For this reason, AR teams at CRE companies tend to report on different metrics.
Versapay combines powerful AR automation with a cloud-based collaborative network, allowing sellers and buyers to collaborate easily on any issue that might hold up payment. Interactive dashboards make it easy to view critical AR performance metrics at a glance, right when you log into the platform.
The result? Increased efficiency and accelerated cash flow—with more satisfied customers to boot.
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