5 KPIs For Accounts Receivable Each Business Should Track

Accounts receivable are one of the most crucial aspects of a business in financial and accounting terms. Account receivable consist of those accounts or, in simple terms, those clients and customers that have bought or availed services on credit. If a business sells on credit, it must also ensure that money is paid without long delays. 

Many businesses are lucrative in terms of profit generation. They have fewer or no Owings, and their clients are also satisfied with them, but they still go belly up. If you wonder why? Then the primary cause of their failure is ineffective cash-flow Management and lack of working capital. How does Account receivable have a connection with cash-flow Management and working capital? You might be thinking, Well, there is a connection between all these.  

As we know, accounts receivable came into being due to credit sales, and sales are what helps the primary source of revenue generation on which a business is highly dependent. Working capital, as we know, is the lifeblood of a business. Working capital mainly consists of cash and credit sales of the business. Credit sales are also part of working capital. If the money is not paid for credit sales, working capital decreases which is a big red flag for business. 

Cash-flow Management is the monitoring of the cash related activities in the business. Net Cash-flow is Cash Inflow (Cash coming into the business) - Cash Outflow (Cash going out of the business). A business with a positive net cash flow is a health indicator. However, if the credit sales are not paid for, there would be less cash-inflow, resulting in negative net cash flow, meaning more money is going out of the business. This is also alarming for a business. 

Now you know how important it is for a business to ensure that its account receivable pays on time. There is nothing wrong with allowing sales on credit. It is one of the ways to strengthen relationships with customers. Still, it is more important for a business to ensure that the trust it is showing to the customer is not violated by the customer and remains reliable. 

So how to ensure that Accounts receivable are managed effectively, well there are Account Receivable KPIs for that. Accounts receivable KPI (Key Performance Indicators) are performance indicators of how well the Account receivable is being managed. There are several Account Receivable KPIs. 

Account Receivable KPIs are one of the most helpful ways to evaluate the performance of Account Receivables. AR KPIs are used to analyze how fast clients pay for purchases. Customers must pay back the money when the sales are made on credit. If there are long delays, then the business is adversely affected. AR KPIs lets you know how effective are customers or clients when it comes to paying back. 

5 Top AR KPIs

As mentioned above, several AR KPIs help a business in Account Receivable Management. To ensure that accounts receivable are well-managed, businesses must use the most relevant KPIs. There is no way a business can effectively manage Account Receivables just by using a single KPI. So, let's dive in and see the essential AR KPIs a business should know. 

1.  DSO

DSO or Days Sales Outstanding is one of the AR KPIs that help businesses know how fast their customers pay them. DSO is also one of the most used and essential KPIs. A business must understand how quickly clients pay them off. This help business in many ways, like future cash-flow projections. 

Another essential benefit of these KPIs is that it helps businesses know their reliable clients. A business should be able to differentiate between trustworthy clients who pay off over a short time and those who make long delays. This business can make decisions like whom should be given credit sales too. This also helps businesses avoid bad debts (uncollected sales), as a business would know that if their clients are unreliable, they can pay quickly. 

One thing to remember here is that the lesser the DSO is, the better it is for a business. This is because a lower DSO means payments for credit sales are made quickly. In addition, when a company has less DSO, the cash flow remains healthy, and cash and bank reserves strengthen, increasing working capital. 

If you need to know how to calculate DSO? Then here is how it can be done: 

DSO = Account ReceivablesTotal Credit SalesNumber of Days 

Don't get confused. You see Debtor Days or Account Receivables instead of DSO; these are the same things and are calculated with the same formula. 

If the DSO of a business is high that it is a red flag for the business, and corrective measures should be taken. These measures could include requesting customers to pay on time or offering discounts for early payments made quickly. 

2. ADD

Here is how you can calculate the ADD. The formula is as below: 

ADD = Regular Days Sales Outstanding - Best Sales Day Outstanding 

3.  ARTR

The Account Receivable Turnover Ratio is another useful KPI. This metric is preferred and highly used to monitor the performance of Account Receivables. 

ARTR is mainly used to determine how quickly credit sales turn into cash. Therefore, the higher the ARTR, the better it is for business. Therefore, a business should always have a high ARTR. If this happens, it results in more cash available for the business. As the business has more cash, its working capital increases, the net cash flow improves, and the cash reserves strengthen too. 

ARTR is also a good indicator of the performance of the Account Receivable team. A low ARTR shows that the AR team is not doing good in collecting payments from credit customers. 

Here is how to calculate ARTR. The formulas are as below: 

ARTR = Total Credit Sales Average Account Receivables 

4.  BD TO SR

Bad Debt to Sales Ratio is a vital KPI. As mentioned above, Bad Debts are uncollected sales, no business wants bad debts, but still, businesses encounter bad debts. 

The bad Debts to Sale Ratio indicates the proportion or the percentage of uncollected debts out of the total sale. If the Bad Debts to Sale Ratio is below 10-15%, then this is not a big thing to worry about for business. But if the percentage ranges above 25%, then this is alarming. This means a significant proportion of sales result in bad debts. 

Also, one thing to remember is that bad debts are treated as expenses in the accounting books. A high BD to SR indicates a rise in expenses which reduces the profit of the business. Apart from this BD to AR ratio also highlights the performance of the AR team in terms of cash collection from account receivables. 

Bad Debt to Sales Ratio can be calculated using the formula given below: 

Bad Debt to Sales Ratio = Bad DebtsYearly Sales100

5.  Expense Per Collection

The Expense Per Collection ratio is the calculation of the amount of expenses a business bear when its AR teams are carrying out the operations of AR collection. The credit recovery from accounts receivables mainly consists of minimal expenditures. This is primarily because the credit customers are communicated via E-mails. 

It is not significant as other KPIs, but some businesses still carry out its calculation. Other businesses ignore the calculation of Expense per collection only because it is often hard to track. 

How To Calculate KPIs Effectively

AR KPIs are important, and these shouldn't be ignored. Till now, you know that these are useful in cahs-flow Management and increasing working capital, but they are also helpful while sales forecasting, cash-flow forecasting, and giving a reliable projection of profit and loss. 

Carrying out the manual calculation of Account Receivable is a hassle. Not only that but doing calculations manually can lead to errors. That is why you need a reliable software solution for Account Receivable Calculation.  

Conclusion

We have gone through a detailed understanding of AR KPIs, and we have told you the most preferred and vital KPIs. Now you have made it a practice to regularly use these KPIs to improve Account Receivable Management. With the discussion and understanding of each KPI, we have also informed you about the benefits of each. 

Account Receivable KPIs calculation can only be done perfectly using Accounting Software. Well, if you start looking for accounting software, then there are many, but the one that stands out from others is ZarMoney.  

ZarMoney is the best accounting software in the market, preferred by thousand of businesses around the world. With its superb functionality and features, it has won the trust of many businesses. ZarMoney is highly preferred for Account Receivable Management. Not only for Account Receivables, but ZarMoney can be used for Inventory Management, Invoicing, Billing, Accounting, and many more. 

Avail the best services of ZarMoney, at affordable prices that no other accounting software can offer.