09.25.2023 | Posted by Erik
How to Measure Your AR Performance: 4 Key Metrics
As business leaders, ensuring the financial health of your organization is always top of mind. One key aspect of a business’s finances is managing accounts receivable (AR) effectively. But knowing how to define and measure AR success can be tricky. In this quick guide, we share key AR metrics to help you gauge your organization’s performance – plus share some tips on how to decide on the best AR management structure for your company.
4 Metrics for Understanding AR Performance and Reporting
AR performance refers to your company’s ability to successfully manage and collect money owed by customers. In other words, your ability to get customers to pay you the money they owe. To assess the performance of your AR process, it’s important to measure and track some key metrics. As a firm providing accounts receivable management services, the primary 4 metrics we use to evaluate AR performance include:
1. DSO – Days Sales Outstanding
DSO = Average # of days between invoice date and payment date
What is DSO? This is an overall, company-wide metric that measures the amount of time that lapses, on average, from the invoice date to the payment date. To calculate DSO, take all invoice dates and pay dates and come up with an average number of days. If your payment terms are longer, like Net 60 or Net 90, your average will be different than a company with mostly Net 30 terms. Notable increases in your average DSO require investigation to determine the reason for the change. Are payments coming in slower due to industry factors, economic circumstances, or has something changed in your billing process or with the product or service you’re delivering? Dig into the patterns in the numbers until you can pinpoint the culprit.
2. ADP – Average Days to Pay
ADP = Average # of days for a customer to pay
ADP is a customer-specific metric that measures the average number of days it takes a specific customer to pay their invoices. It’s similar to DSO, except specific to an individual customer. Similarly, you can also calculate Average Days Delinquent (ADD) or Average Days Late. For example, if a customer’s ADP is 37 days on Net 30 terms, their ADD would be 7 days. Note that if you have different terms for different products that you ship, ADD can be a more accurate metric.
3. Aging Buckets
Aging bucket = Percentage and total dollars of invoices in each stage of aging
Aging buckets measure how many dollars are in each aging bucket, representing their status in relation to payment terms. Common aging buckets include:
- Current (within terms)
- 1-30 days past due
- 31-60 days past due
- 61-90 days past due
- 91+ days past due
To gauge how late invoices are getting paid, add up all outstanding invoice balances in each bucket. If the numbers are going up in a certain bucket, there’s usually a good reason. Here, 60 days is typically the cutoff between typical invoicing errors and a bigger problem with payment:
- Below 60 days: These late invoices can often be explained by customers not getting invoices or something simple to fix, like the wrong AP contact or a missing reference number.
- Over 60 days: If this number keeps growing, it signals a bigger problem like a breakdown in your AR process, an issue with the products or services you’re delivering, or insufficient credit investigation when vetting new customers.
4. Over 60 Days Past Due Totals
It’s important to track over 60 past due totals as a way to gauge the overall health of your invoices, as mentioned above. When you start getting an abnormal volume of over 60 past dues, you know there’s a serious problem. Because of this, we recommend reviewing over 60 day metrics either monthly or quarterly, depending on the volume of your invoices.
What is a “healthy” portion of over 60 invoices? It’s ideal to see less than 3% of invoices more than 60 days past due, which is the average for Axim clients.
But What is a Good DSO?
As with most things in business, it depends! A good DSO will vary based on your industry and payment terms. However, the goal for Net 30 terms is under 45 days. It’s important to understand your specific company metrics and compare current month performance to last month and last year.
The Benefits of Outsourced Accounts Receivable Management Services
With an eye towards AR performance, outsourcing your AR provides significant benefits, including:
- Focused Reporting: Access insights and reporting focused only on your AR. At Axim, our reporting gets really granular, and we get to know your aging very well since we’re tracking your receivables data closely. If there’s a breakdown anywhere along your company’s process of providing a product or service to your customers, it will show up in your AR, and we will let you know.
- Accurate Invoice-Level Data: Getting down to invoice-level data is very important. For example, Axim sends reporting on an invoice-by-invoice basis (instead of account-by-account basis), so you know exactly where each invoice is in the payment process.
- Custom Data Specific to Your Industry: If you need other custom data specific to your industry, an outsourced receivables firm can usually provide it. At Axim, we can customize metrics in our database to pull out for you.
- Reduced Responsibility: Outsourcing your AR reduces the responsibility of your in-house staff to manage receivables on top of all their other responsibilities. This lets you focus on other critical aspects of your business while having peace of mind knowing that your AR is being managed by professionals.
Find AR Success with These Metrics
Measuring and tracking AR performance is crucial to maintaining your company’s financial health. By understanding these 4 key metrics and potentially partnering with an outsourced AR firm like Axim, you can take steps to optimize your AR process and ensure that you’re collecting payments efficiently and effectively.