What Is Accounts Receivable Analytics (+Top Metrics You Should Measure)

Introduction

To achieve your revenue and collection goals, having a roadmap with regular checkpoints and actionable steps is crucial. Data plays a vital role in understanding operations and customer experience, and fortunately, there’s plenty of data available today.

But which metrics should you focus on to effectively measure success and make informed business decisions? Which metrics truly impact your receivables process? In this guide, we’ll help you find the answers.

Top Accounts Receivable Metrics

Choosing the right Key Performance Indicators (KPIs) for Accounts Receivable Analytics can be overwhelming, considering so many metrics. To help you kickstart your AR performance measurement, we’ve gathered insights from seasoned finance experts and identified the 10 best metrics to focus on:

Accounts Receivable Turnover:

1. Definition: Accounts Receivable Turnover evaluates how efficiently your business collects outstanding receivables during a specific period.
2. Formula:Accounts Receivable Turnover = Net Credit Sales / Average Accounts Receivable
3. Use Case: This KPI indicates the frequency at which you convert receivables into cash, helping assess the effectiveness of your credit and collection processes.

Days Sales Outstanding (DSO):

1. Definition: DSO measures the average number of days it takes to collect customer payment.
2. Formula: DSO = (Accounts Receivable / Average Daily Credit Sales)
3. Use Case: DSO helps evaluate the efficiency of your collections process and indicates how long it takes to convert sales into cash.

Average Collection Period:

1. Definition: Average Collection Period represents the average number of days it takes to collect outstanding payments.
2. Formula: Average Collection Period = 365 days / DSO
3. Use Case: This ratio assists in assessing your collection efforts’ effectiveness and identifying improvement areas.

Aging of Receivables:

1. Definition: Aging of Receivables categorizes outstanding receivables based on the number of days they are overdue.
2. Formula: Calculated by grouping receivables based on the number of days outstanding. (e.g., 0-30 days, 31-60 days, 61-90 days, etc.)
3. Use Case: It provides a snapshot of overdue payments, allowing you to prioritize collection activities and implement targeted strategies.

Cash Conversion Cycle:

1. Definition: The cash Conversion Cycle measures the time it takes for the cash to flow back into the business after the sale of goods or services.
2. Formula: Cash Conversion Cycle = DSO + Days Inventory Outstanding – Days Payable Outstanding
3. Use Case: This KPI evaluates the efficiency of your cash management and working capital by analyzing the time it takes to convert inventory and payables into cash.

Customer Payment Trends:

1. Definition: Customer Payment Trends track the frequency and consistency of customer payments over time.
2. Formula: Analyzing the payment behavior of customers over specific periods.
3. Use Case: It helps identify customers who consistently pay late or exhibit irregular payment behavior, facilitating proactive credit risk management and tailored collection strategies.

Bad Debt Ratio:

1. Definition: Bad Debt Ratio indicates the percentage of sales that turn into bad debts.
2. Formula: Bad Debt Ratio = (Total Bad Debt / Total Credit Sales) * 100
3. Use Case: Monitoring this ratio helps evaluate credit risk, refine credit policies, and minimize financial losses due to uncollectible debts.

Collection Effectiveness Index (CEI):

1. Definition: CEI measures the effectiveness of your collection efforts by assessing the percentage of outstanding receivables successfully collected within a specific period.
2. Formula: CEI = (Cash Collected / Beginning Receivables – Ending Receivables) * 100
3. Use Case: CEI highlights collection performance and guides improvement strategies, ensuring efficient cash recovery and reducing outstanding receivables.

Collection Effectiveness Period (CEP):

1. Definition: CEP calculates the average number of days it takes to collect payments after the due date.
2. Formula: CEP = (Ending Receivables – Beginning Receivables) / Total Credit Sales * Number of Days
3. Use Case: CEP provides insights into the timeliness of your collections and identifies potential bottlenecks in the payment process.

Customer Lifetime Value (CLTV):

1. Definition: Customer Lifetime Value predicts the net profit a customer generates during their entire relationship with your company.
2. Formula: CLTV = (Average Annual Revenue per Customer * Average Customer Lifespan)
3. Use Case: CLTV helps prioritize customer segments and enhance customer retention strategies.

Check out our “Cash Flow Statement Analysis” guide for step-by-step instructions on measuring the metrics covered in this post, plus several more on financial statements like cash flow, income, and balance sheets.

Tools for Tracking Accounts Receivable Analytics

Data can be intimidating—all those charts, numbers, and spreadsheets. Tracking all the crucial accounts receivable metrics manually is nearly impossible. Fortunately, there are automated tools available that streamline the tracking process. These tools enable you to capture, process, and iterate on AR performance metrics effortlessly.

Integrated Autonomous Receivables Tool

An integrated receivables tool is a game-changer for efficient financial management. By providing a unified platform to store customer and transaction information, it simplifies and accelerates the collections and overall receivables process. With automated data collection and analysis, finance teams save time and gain AI-driven insights for improved cash management.

With solutions like HighRadius’s autonomous receivables, managers gain complete visibility into aging analysis and can track progress across the receivables cycle. Our software enables you to gather, analyze, and leverage customized financial metrics tailored to your business needs. With advanced reporting and customizable dashboards, identifying trends and optimizing your processes becomes a breeze.

Features of an Integrated Tool:

• Real-time and historical data trends: Access powerful reporting to understand past customer payment trends and take timely actions.
• Pre-built dashboards: Analyze collections and credit performance using pre-built dashboards with best practice metrics.
• Customizable dashboards and reports: Customize metrics, charts, filters, and dashboards to fit your specific needs.
• Monitor analyst productivity: Monitor performance and identify areas for team development.
• Fine-tune receivables operations: Identify and address problem areas in aging analysis to spend more time with at-risk customers and maximize collections.

Enterprise Resource Planning (ERP) Systems

ERP systems are powerful tools that automate processes across the receivables cycle, serving as a reliable source of truth for all your data and technology needs. As businesses grow, managing complex operations becomes easier with ERP software.

With ERP systems, manual process tracking errors are reduced, and finance teams gain access to ready-made reports and dashboards, enhancing efficiency and user experience.

However, it’s important to note that while ERP systems offer numerous benefits, they are designed to cater to multiple industries and may not be tailored specifically to one particular segment.

Point Solutions

Point solutions are specialized software that focus on specific functions within the receivables cycle. They offer a comprehensive view of the particular function and its associated metrics.

These solutions can be integrated with larger ERPs or integrated systems, enabling you to assess process sentiment and generate reports that highlight trends and performance.

While point solutions may initially seem affordable and reliable for immediate needs, they can become inadequate as your business scales and evolves. They may struggle to keep up with the changing landscape of your growing business in the long run.

Spreadsheets

While not as sophisticated as ERPs or point solutions, spreadsheets can still be effective tools for tracking accounts receivable analytics. You can create customized spreadsheets to capture relevant data, calculate KPIs, and generate reports. Spreadsheets offer flexibility and can be easily customized to suit your specific requirements, making them a popular choice for smaller businesses or those starting with basic analytics.

When choosing the right tool for your accounts receivable analytics, consider factors such as the size and complexity of your business today and for tomorrow, the level of automation required, and your budget. Click here to learn more about selecting the right tool for your business’s accounts receivable analytics.

Conclusion

Sometimes, we can be overwhelmed with too much information and lose our way. This is especially true with all the data and metrics available to measure how well we collect receivables and build our cash flow.

In this guide, we’ve defined a path through all that data and provided some expert advice about how to best use the metrics that we’ve found essential for managing your own receivables operations. We hope that you’ve found it useful. 

You can learn more about the tools we use to measure all of our essential metrics at https://www.highradius.com/autonomous-finance/