One of the key elements of running a financial operation at scale is having the right metrics in place. It’s hard enough on a small scale to understand what’s going on with your receivable balances, but when the scale increases 10x, it becomes an impossible task.
Here’s a few of the key measures (kpi’s from hereon) I’ve used in the past to start up new teams and then to drive performance longer term. This is not intended to be exhaustive, kpi’s are such called because they are few in number, but give you a good overall steer, but you need to have access to many more measures day to day, to truly understand trends.
Also, a note of caution, kpi’s never give a complete picture, and to build truly great teams, you need to understand far more than just the numbers. You cannot just manage a metric, but it’s definitely a start.
Cash v Invoicing
Always my “go to” metric for a new team that is starting from behind. When you start working collections, the primary goal is to make sure any issues are not getting worse – ie stop the bleeding first.
Cash v invoicing is measuring the total cash your teams banked this month against how much you invoiced.
The goal is to have more than 100%, ie you brought in more money than you billed and your overall AR has reduced at month end, ie your total credit exposure is falling.
This is great to motivate teams because if you have a bad month, and get less than 100%, it’s easier to make up the difference next month (since you’re chasing the miss last month and this months). It’s also easy to measure and there’s little room for dispute (your judgement call as to whether you take credit memos off invoicing or not, I prefer not to).
As teams mature, getting to 100% gets harder and harder since there’s less easy old debt to collect and teams have to start to chase balances in current. One items to consider here is your credit term, I prefer to not have long term credit terms, but if you do, you may need to match to your credit term. For example, if your clients get 60 day terms, you can compare to invoicing issued 60 days ago.
Days Sales Out (DSO)
The industry standard which measures how much of your revenue is currently awaiting cash payments at the end of the month. There are many different versions but there’s two which I like to use for teams.
Countback DSO – Accounts Receivable at the end of the month divided by billing for the month multiplied by days in the month
Theoretical DSO – Same as above, but instead of total AR, take only due for payment AR.
Easy to calculate and understood by most people with contact to any form of invoice based business. This measure allows for easy benchmarking against other businesses, creates a good understanding for internal partners of how good or bad their accounts are performing and is a consistent measure for every collector to get each month.
What you specifically target is another question, but by tracking DSO, and setting a realistic target, you can manage some of your underperforming areas by pushing a little harder in easier markets. Essentially it’s a measure of how well you can manage working capital month to month. By focusing on each month, rather than an annual DSO, you eliminate the impacts of any seasonality on your business and it therefore builds a good habit of managing your aged debtors because it can really hurt a performance if you let it build without cleaning.
The big downside is if you are a business that has multiple different credit terms, or bill throughout the month. DSO is at the mercy of those cycles and therefore is not a pure reflection of collection effectiveness, but more a measure of the complete operation, including credit management. This leads to…
By eliminating the impact of not yet due balances from the measure, you can focus on your collectors performance. Ideally, you can hit a DSO of zero if everyone paid to term, but in reality things defeat your ability to deliver this, but it should be straightforward in a well run AR function to hit a DSO on this measure in single digits. If you’re above 9 days on this measure, there’s some problems in your process.
Write offs + Credit memos for the month / invoiced.
Assuming you are on a monthly cycle, this measures how much of your revenue your collectors are giving away each month to billing disputes. In some industries this may be higher than others, but your obvious target is to keep this as low as possible. Setting a target is something that you need to work hard with your sales teams to hit, and agree on how flexible you want to be.
Personally, I believe that provided a bill is correct when issued, there is little reason to offer discounts (unless you’re asking for faster payment), but you need to have a very clean and simple business process to get to invoice, and a very supportive sales team as every partner at some point will try and call in a favor. The best my teams have achieved is below half of one percent which means pretty much everything we bill is collected which gives execs a lot of comfort they can invest what is billed without risk.