Mastering KPIs: 5 Strategies for Tracking and Improving Accounts Receivable
Financial operations within the supply chain are becoming increasingly complex, driven by globalization, technological advancements, regulatory changes, growing logistics stakeholders, and unpredictable transaction volumes. Mastering key performance indicators (KPIs) is essential for businesses to optimize efficiency, profitability, and cash flow in their accounts receivable operations.
As the newest installment in our ‘Mastering KPIs’ Series, this FPI article takes a deep dive into a few of the industry's top accounts receivable KPIs and discusses strategies for mastering them.
1. Days Sales Outstanding (DSO)
Days Sales Outstanding (DSO) is the fundamental KPI for the accounts receivable operation. This KPI is critical in evaluating a company's financial health and understanding its cash flow. It measures the average days a company takes to collect payment after a sale. DSO provides insights into the efficiency of a company's credit and debt collection processes, helping identify potential issues and areas for improvement.
A lower DSO indicates that the company collects receivables quickly, positively impacting cash flow. If a business consistently rates a low DSO score, it suggests a healthy industry, efficient accounts receivable operations, and satisfied customers. On the other hand, a high DSO could mean that a company's collection processes could become more efficient or that it's selling to customers who take longer to pay their dues, posing potential risks to the firm's liquidity.
Payment predictability, as part of DSO, focuses on forecasting and predicting the timing of invoice payments. By analyzing historical data and customer behavior, companies can estimate when invoices will likely be paid, thereby enhancing cash flow management and financial planning. Improving this helps companies better anticipate and manage their working capital needs.
Regularly following up on outstanding invoices and maintaining clear communication with clients about payment expectations and terms are all ways you can master DSO. It's also essential to regularly track and analyze DSO figures to detect any changes or trends that could indicate emerging problems.
Expert Tip: Check out “What Is Supply Chain Digitization, and Why Does It Matter?“ to learn ways you can slash your DSO with an expedited, money-generating AR process, regardless of what is impacting the supply chain.
2. Best Possible DSO
Best Possible Days Sales Outstanding (Best Possible DSO) represents the lowest possible average number of days a company theoretically takes to collect payment after a sale. This metric defines the ideal scenario if no payments were ever late.
Best Possible DSO offers a benchmark against which a company can compare its actual DSO. The difference between existing DSO and the Best Possible DSO can provide insights into the effectiveness of a company's credit policies and collections efforts. A smaller gap indicates that a company is close to its optimal receivables collection efficiency, while a more significant gap may suggest some inefficiencies or issues that need to be addressed.
Bill processing time is crucial for Best Possible DSO because it directly impacts the cash flow of a business in several ways, such as:
- Cash Flow Management: Efficient bill processing ensures timely collection of payments, which improves cash flow. By minimizing the time it takes to process bills, companies can send invoices quicker, accelerate the inflow of cash, and reduce delays in receiving payments from customers.
- Working Capital Optimization: Faster bill processing reduces the average collection period, allowing companies to optimize their working capital. This enables them to allocate resources more effectively, invest in growth opportunities, and meet financial obligations.
- Customer Satisfaction: Prompt billing and accurate invoices contribute to positive customer experiences. Timely processing of bills helps maintain customer satisfaction, reflecting professionalism, reliability, and efficiency in the business relationship.
- Relationships with Suppliers and Partners: Efficient bill processing builds trust and strengthens relationships with suppliers, carriers, and other partners in the supply chain. It fosters collaboration, improves communication, and establishes a reputation for prompt payment, leading to mutually beneficial partnerships.
Expert tip: Companies can also leverage automated debt collection software to streamline the process, ensuring timely follow-ups and reducing the possibility of human error. Multiple convenient payment methods and early payment discounts can encourage prompt payments.
3. Average Days Delinquent (ADD)
Average Days Delinquent (ADD) provides a clear picture of the average time it takes for a company to collect overdue payments. ADD directly impacts a business's cash flow, influencing its financial health.
A high ADD suggests that a company may face challenges in collecting payments, which can tie up working capital and potentially lead to liquidity issues. On the other hand, a lower ADD indicates efficient collections processes and healthy cash flow.
Mastering ADD involves:
- Implementing stringent credit control procedures.
- Regularly following up on overdue invoices.
- Maintaining clear communication with clients about payment expectations.
It's also crucial to regularly analyze ADD metrics to identify any changes or trends that could suggest emerging problems.
Leveraging technology can also help. Companies can benefit from using technology and automation to streamline their invoicing and collection processes, ensuring timely collection and reducing the possibility of human error.
Expert Tip: When one tool can work seamlessly across your organization in the field, back office, and front office- team leaders can manage operations more efficiently, utilizing time-saving automation and making real-time adjustments that give companies an edge over the competition. READ: How to Boost Efficiency in Freight Operations
4. Invoice Accuracy Rate
Do you know how many invoices you submit to your customers have errors? To learn your invoice accuracy rate, divide the number of invoices confirmed as accurate by your customer by the total sent. If the result is less than 95%, it might signal a problem with your invoicing process.
Payment terms and freight classification are just two examples of the top billing errors today - and these, among others, will delay payment. Additionally, inaccurate invoices that do not account for accessorial charges or other fields completed at the time of order that have to be corrected negatively impact the amount you will actually collect.
By increasing invoice accuracy, you will decrease payment delays. You will mitigate disputes between you and your customers by capturing and auditing the correct and complete information, including details such as shipment dates, quantities, rates, and any applicable discounts. Errors or invoice discrepancies can lead to misunderstandings, disagreements, and legal complications. By meticulously reviewing and validating invoices before sending them to customers, carriers can maintain positive relationships with their clients.
Accurate invoices drive improved cash flow management. Timely and accurate invoicing ensures that payment is received within specified payment terms, allowing better planning of financial resources to meet obligations to suppliers, employees, and other stakeholders.
In addition to avoiding payment delays and disputes, invoice accuracy supports compliance with contractual terms for all parties. By demonstrating transparency and trustworthiness in fulfilling these contractual obligations, your shippers are more likely to choose you in the future over a competitor.
Expert Tip: Implement rigorous processes and controls to achieve high invoice accuracy. This includes verifying data accuracy, double-checking calculations, reviewing supporting documentation, and conducting internal audits. Technology such as DDC Sync or Auto Extraction & Structuring can enhance accuracy and efficiency without growing overhead.
5. Revenue Adjustments
Revenue adjustments are a valuable metric to ensure accurate revenue recognition, identify billing discrepancies, facilitate cost recovery, enhance customer satisfaction, and improve process efficiency. Revenue Adjustments reflect the performance of your billing operations. Here are some examples:
- Payment Accuracy: Accurate bill data ensures customers are invoiced correctly, minimizing payment discrepancies and errors. This leads to more accurate and timely payments, improving cash flow and reducing the need for revenue adjustments or disputes.
- Customer Satisfaction: Providing accurate bills enhances customer satisfaction by avoiding billing errors that may cause frustration and delays in payment processing. Customers value reliability and professionalism in business relationships, and accurate billing demonstrates attention to detail and commitment to service excellence.
- Efficient Operations: Inaccurate bill data can lead to various operational inefficiencies. By maintaining high levels of accuracy, businesses can reduce time spent on correcting errors, addressing customer inquiries, and resolving disputes. This allows the accounts receivable department to operate more efficiently and focus on other critical tasks.
- Financial Reporting Integrity: Accurate bill data is a foundation for reliable financial reporting. It ensures the accuracy and integrity of financial statements, enabling accurate analysis, forecasting, and decision-making. Moreover, accurate billing data aids in complying with accounting standards and regulatory requirements.
- Audit Compliance: Accurate billing data is essential for audit compliance purposes. It provides the necessary documentation for audits, internal controls, and financial reviews. Reliable bill data supports transparent and accurate financial records, enabling businesses to meet legal and regulatory obligations.
Mastering these Accounts Receivable KPIs involves proactive collection strategies and efficient resolution processes. Transportation and logistics companies can maintain a healthy cash flow, improve customer relationships, and ensure business sustainability by focusing on these areas.
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