AR managers have a myriad of responsibilities. The company’s cash flow, financial forecasts, budgets, and debt collection efforts are all on your team’s task list. While much of your tracking and reporting focus is on other departments, it’s also critical to measure your internal team performance. AR analytics can be a tool used to assess your team’s effectiveness and inform personnel decisions.
Common metrics and KPIs
Some analytics you’ll measure for your AR team are metrics and others are KPIs. KPIs are strategic, while metrics are tactical. In other words, KPIs measure business goals, while metrics track efforts in support of KPIs.
Here are some you may want to track:
- Days Sales Outstanding (DSO): estimates your AR collection gap as an average.
DSO = [(AR / credit sales) x days in the period]
- Average Days Delinquent: measures the average in days it takes to get paid.
Average Days Delinquent = [DSO – (best possible DSO = current AR/credit sales)]
- Collection Effectiveness Index (CEI): reflects your ability to collect from customers.
CEI = [(beginning AR + invoice revenue – ending AR)/(beginning AR + invoice revenue – current AR)]
- Accounts Receivable Turnover (ART) Ratio: measures the efficiency of your credit and collection efforts. ART = net credit sales / average AR
- Working Capital KPI: measures the company’s ability to meet short-term financial obligations using current assets. Working Capital = current assets – current liabilities.
- Operating Cash Flow KPI: reflects the income generated by daily operations.
Operating Cash Flow = net income + non-cash expenses + changes in working capital.
Steps to take before you start tracking
If you’re not currently tracking internal AR department metrics and KPIs, it’s time to get started. Lay the foundation by:
- Deciding which metrics to track and what you hope to accomplish by tracking them.
- Benchmarking where your department is now for those metrics and KPIs.
- Setting goals for the chosen measures.
- Discussing with your team what you’ll track, goals, and why you’re tracking.
- Creating actionable feedback for your staff as you track.
Tips for selecting metrics and KPIs
When selecting data to measure AR department effectiveness, the goal is improving performance. Make sure the metrics and KPIs you monitor encourage staff behaviors that align with company goals. Tracking for the sake of tracking is time wasted and can be a productivity killer.
Tracking metrics and KPIs should ultimately improve your department, but overly granular tracking measures could encourage activities contrary to your goals. For instance, tracking how long it takes to process invoices (and pushing for rapider task completion) could encourage rushing, resulting in erroneous billing.
- Set goals that are so unattainable that they are burdensome.
- Track metrics that will drive behaviors misaligned with the mission.
- Choose an excessive number of metrics and KPIs to track.
- Select metrics that don’t reflect department effectiveness.
- Choose KPIs/metrics your staff cannot affect.
- Track over time, and allow ample time for improvement.
- Cull metrics/KPIs that don't provide insight into departmental effectiveness.
- Eliminate tracking efforts that don’t offer actionable results.
- Keep your staff informed along the way.
- Acknowledge and reward progress toward goals.
Bear in mind that tracking metrics and KPIs shouldn’t be about just the numbers. If your staff is productive and also has high job satisfaction, low absenteeism, and great morale, you don’t want to throw that away by pushing for meaningless efficiencies.
Tracking analytics is just one piece of measuring department effectiveness. As an AR team, reasonable expectations are that invoices are accurate, punctual, and paid within terms and that reporting meets deadlines with precision.
Don’t get so caught up in the analytics that you lose sight of the bigger picture. Leverage your AR analytics wisely! To find out more about how AR automation can provide you better visibility and deeper insights into your overall AR health and payor trends with real-time dashboards,, check out YayPay.