To measure recovery on receivables, key performance indicators are important for any business to develop a successful credit and collection plan. As there are many different KPIs used in debt collection, finding out which ones will work for you to improve your business’ operation is the key. To investigate whether your current collection practice needs improvement by introducing new KPIs, first step to do is analyse your existing customer accounts data. Such a record will help you to identify trends and find out which part of the collection process might need tending to. It is advisable to go through the data with a member of your finance team who may have more insight into what tactics have worked best and may even have some new ideas to try.
As there are a number of useful KPIs to work with, we have put together some that are most likely indicators of success when it comes to evaluating performance goals in the world of collections.
One very popular account receivable KPI used among nearly all finance departments is the reduction in average days to pay. Debtor days stand for the average number of days it takes for the business to receive payment from its customer once the invoice was handed to them. The smaller the number of debtor days, the more cash is available for the growth of the business. If the number is high, the business is hampered, as the creditor must invest and pay expenses out of the company reserves.
Another helpful KPI is the reduction in average outstanding receivables. Businesses with small collection periods tend to be more solvent as they have better cash flow. A slow collection process can compromise an entire business; hence it is best to train personnel to tighten up the procedures by offering favourable terms to customers who pay early, one example could be a percentage on the next bill. For steady cash flow, it is also common practice for some departments to send out reminders a week prior to a due payment date.
Reduction in bad debt is another useful collection KPI since lack of cash flow can weaken a business’ ability to compete and grow. There are several ways to reduce bad debt, one of them is credit screening any new customer to identify clients who might be severe credit risks before signing a deal. Another way to reduce bad debt is to let a debt collection agency handle your accounts receivables as such professionals are specialized in preventing and collecting bad debt in a timely manner.
Consequences can be severe if money does not come in at a rate that helps pay the bills, especially for a small business. To ensure proper cash flow management, accurate accounts receivable forecasting is vital and requires close monitoring. There are certain practices that help to make sure such forecast is accurate and helpful in order to reduce collection problems. Keep a close eye on your business indicators when preparing your cash flow forecast. Look out for upcoming big deals, which could bring positive cash flow or internal investments that need to be made in the near future. Your forecast should be estimated weekly or at least monthly to assess when these deals will close and might generate cash.
Without successful collections, it is impossible to stay in business for long as wages need to be paid, as well as office supplies and licences and maybe even rent for the building you’re in. This makes debt collection one of the most important areas of your business and you might want to consider investing in account receivables software to be able to not only store all information in one central place but save time by letting the software create invoices automatically and remind you of the upcoming due dates.