In this chapter, we discuss some additional metrics that should be tracked by finance executives to ensure complete optimization of accounts receivable management. Each metric either falls into the performance bucket, a measure of the process, or the productivity bucket where the focus will be on the efficiency of people.

Cash Conversion Cycle

Definition: Every business tries to collect receivables as fast as possible while delaying paying A/P until the due date. Suppliers produce with cash, sell on credit and again collect in cash. The cash conversion cycle(CCC) looks at the amount of time needed to sell inventory, collect receivables and pay bills without incurring penalties. How A/R performance impacts Cash Conversion Cycle: Lower Days Sales Outstanding (DSO) directly leads to a lower CCC. Lower DSO can be achieved by setting the right credit terms with policies and speeding up the conversion of receivables. Companies are leveraging techniques and best-practices including electronic invoicing for fast, accurate invoice delivery, automated and prioritized collection processes and improved credit scoring systems to collect faster

Accounts Receivable Turnover

Definition Accounts Receivable Turnover is used to quantify a firm’s effectiveness in extending credit and in collecting debts on that credit. The receivables turnover ratio is an activity ratio measuring how efficiently a firm uses its assets. The receivables turnover ratio can be calculated by dividing the net value of credit sales during a given period by the average accounts receivable during the same period. Average accounts receivable can be calculated by adding the value of accounts receivable at the beginning of the desired period to their value at the end of the period and dividing the sum by two. A high turnover ratio indicates a conservative credit policy coupled with an aggressive collections department, as well as a number of low-risk customers.? How A/R performance impacts Accounts Receivable Turnover: A higher ratio means A/R is being converted to cash infrequent intervals. The more frequently A/R is collected the higher cash flow and liquidity. There are a number of different tactics that improve the accounts receivable turnover:

• Iterating and improving credit policy
• Standardizing collections correspondences with in-built templates
• Making sure the productivity of the employees is tracked

Aging Buckets

Definition Customers are categorized into Aging Buckets based on the past due duration of A/R, e.g. Past Due 0- 30, Past Due 31-60, Past Due 61-90. A customer belonging to a lower aging bucket is low risk and a customer belonging to a higher bucket is high risk. How A/R performance impacts Aging Buckets Customer correspondence strategy and account coverage are critical to ensure that most receivables stay current i.e. within payment terms. By employing proactive reminders/early payment discounts before the invoice is due and dunning letters after the invoice is due will largely prevent invoices from aging. Collections departments have to focus on not letting accounts move beyond the 90 days bucket. This is one of the reasons why collections analysts rely on aging buckets to prioritize who to call.