6 KPI’s to help you measure your credit control
12/07/2020 / Comments 0
You already know how important it is to practise good credit control, and it’s likely that you have a set of strategies in place to make this happen. But how can you measure your credit control to track improvements and pinpoint problem areas?
No matter the size or age of your business, credit control will always be a key area to monitor and improve. You can check out our blogs on mastering your credit control in 7 days or 5 effective credit control strategies to implement after making a sale to pick up more tips on how to improve your credit control.
But what should be your next step? Surely, it’s not enough just to implement these methods and then sit back and hope they make a difference. Every business is different, and to figure out the best way to help your business, you’ll need to identify your key problem areas.
Like with any other business decisions, this should mean acquiring metrics and reporting that can help you make informed decisions.
To help you get started gathering the right data, we’ve pulled together our top 6 KPI’s to analyse your accounts receivable performance.
Days Sales Outstanding (DSO)
This metric is one the most frequently used, and also one of the most important metrics for tracking your credit control. It determines the average length of time it take for your business to collect owed money.
When interpreting this metric, it’s important to bear several things in mind.
- Every industry will have a different average, so be sure to check what yours is to determine how you measure up.
- DSO tends to fluctuate, so you should try and look at around a year’s worth of data to draw truly valuable insights.
- DSO gives a high level overview of what is happening in your collection cycle, so you should use it in conjuncture with other metrics to get the most value.
Bearing these points in mind, DSO can be a great way to track performance over time, and measure the impact of any large scale changes you have made to your accounts receivable procedures.
It can also help you to determine the priority level of improving your credit control when compared against your industry average.
Collection Effectiveness Index (CEI)
Another commonly used metric that provides a high level overview is CEI. It provides a percentage value that represents how much of any money owed to you in a given period was successfully collected.
For example, if in a month you managed to collect all of what was owed to you, with no payments left outstanding either from before or during that month, your CEI for the time period would be 100%.
The formula for calculating CEI = (Beginning receivables + Monthly credit sales – Ending total receivables) / (Beginning receivables + Monthly credit sales – Ending current receivables) x 100
CEI can be analysed alongside DSO, and you would expect to see them moving in opposite directions. If your DSO has gone down consistently over a set period where your CEI has gone up, this would suggest things are changing for the better.
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Accounts receivable turnover rate (ART)
ART can be used to get a measure of cash flow and liquidity in your business. It measures how frequently accounts receivable are turned into cash.
The more frequently you are collecting, the better your cash flow is likely to be, and this can be calculated with the following formula:
ART = Net credit sales / Average accounts receivable
Average days delinquent (ADD)
ADD should be used alongside your DSO to draw more accurate conclusions. It indicates the effectiveness and efficiency of your processes at collecting receivables on time.
ADD = DSO –Best possible DSO
Best possible DSO = (Current receivables x Number of days in invoicing period) / Credit sales for period
When comparing the ADD and DSO, you should be looking to see whether they are moving up and down together (plotting both metrics on a graph may make this easier to see). If they are, you can determine that your ability to collect receivables is either being improved or is declining.
When the two statistics are moving in different directions, this indicates that something else may be going on to cause the change in your DSO and it will require further investigation before you draw any conclusions.
Right party contacted (RPC) and Promise to pay (PTP) rate
Two statistics that are often used in collections agencies, tracking these can help you identify where you may be falling short in your collection efforts.
Your RPC rate tells you the percentage of outbound calls that result in you talking to the person with whom the debt is associated (or the right party).
If this number is very low, it may be that you have a problem with identifying or contacting the right person, and you could consider adjusting your strategy around this. Maybe you could try asking for multiple contact details earlier in the buying process or maintain regular contact with clients before payments become overdue to develop a more open communication with them.
Your PTP rate covers the next step. It should indicate how many outbound calls result in the debtor making a promise to pay.
If your RPC is high but your PTP is low, this could indicate an issue with your approach to collection phone calls, and it may be worth seeking training or guidance for the person responsible for making them.
Number of Revised Invoices
Although not a standard metric, keeping track of invoices that have been revised or disputed and the reasons could help you identify further areas for improvement.
It could be something as simple as adjusting the layout of your invoice to make certain information more apparent, or considering accepting a different payment method, such as BACS.
You can look for patterns in the type of customers that dispute invoices, the problems they have and how they were resolved and use this to help shape your new strategy going forward, by addressing potential issues upfront and better predicting accounts where there may be a problem down the line.
If you want to find out more about how we can help you to improve your credit control performance, you can download our credit control brochure or contact our team on 0800 9774848 (email firstname.lastname@example.org) to see how Hilton-Baird can help your business.