Accounts Receivable KPIs: Assessing Financial Performance

Accounts Receivable KPIs: Key Metrics for Assessing Financial Health and Performance

In this article, we outline 4 key Accounts Receivable KPIs your organisation can use to assess their financial performance.

When it comes to managing liquidity, proper handling of accounts receivable ensures timely payment, and keeps the financial health of a company balanced. Keeping track of Key Performance Indicators (KPIs) acts as a guiding light to measure the performance of how well accounts receivable is holding up. These KPIs strengthen the structure of a business so that stakeholders can review the effectiveness of accounts receivable processes.

By staying on top of AR management, businesses can optimise cash flow, reduce debt risk, and invest in growth opportunities. Whether it’s reducing Days Sales Outstanding (DSO), improving accounts receivable turnover ratio, or minimising the percentage of overdue receivables, KPIs help companies stay agile, proactive, and responsive in balancing their financial health.

Types of Accounts Receivable KPIs

Let’s dive into some specific accounts receivable KPIs and their significance in assessing financial performance.

Days Sales Outstanding (DSO)

Days Sales Outstanding, or DSO, is a critical accounts receivable KPI that measures the average number of days for a company to collect payment after a sale has been made. A high DSO indicates that it takes longer for customers to pay their invoices. It can potentially signal cash flow problems or inefficiencies in collections processes. By tracking DSO regularly and comparing it to industry benchmarks, companies can therefore identify trends and pinpoint areas for improvement. It also enables organisations to take proactive measures to expedite cash inflows.

Use our FREE Days Sales Outstanding (DSO) calculator.

Accounts Receivable Turnover Ratio

The accounts receivable turnover ratio measures how efficiently a company is managing its accounts receivable by comparing net credit sales to the average accounts receivable balance during a specific period. A high turnover ratio suggests that a company is converting credit sales into cash quickly. While a low ratio may indicate inefficiencies in collections or credit policies. By monitoring this KPI, companies can optimise AR management practices, improve cash flow, and enhance overall financial performance.

Percentage Of Overdue Receivables

The percentage of overdue receivables measures the proportion of accounts receivable that are past due or outstanding beyond their payment terms. This accounts receivable KPI helps companies assess the effectiveness of their collection efforts, identify potential credit risks, and prioritise follow-up actions on overdue accounts. By reducing the percentage of overdue receivables, companies can minimise bad debt, enhance cash flow, and strengthen their financial position.

Average Collection Period

The average collection period calculates the average number of days it takes for a company to collect payment from customers after a sale has been made. This metric offers insights into the efficiency of collection processes. It helps companies identify opportunities to streamline workflows and improve cash flow. By reducing the average collection period, companies can accelerate cash inflows, optimise working capital management, and drive overall financial performance.

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Conclusie

Each of these KPIs provides valuable insights into different aspects of a company’s accounts receivable management practices. They help businesses assess financial health, identify areas for improvement, and make informed decisions to drive success.

Download our free accounts receivable solutions data sheet to discover how we can help you achieve your KPIs.

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