Common AR Recovery Metrics and How to Use Them
Accounts receivable (A/R) recovery is an important aspect of any business, as it is necessary to collect outstanding debts to maintain a positive cash flow. However, monitoring A/R recovery can be a daunting task for businesses. That’s where A/R recovery metrics come in handy. These metrics help businesses monitor their A/R recovery performance and make data-driven decisions to improve their recovery process. We’ll discuss some common A/R recovery metrics and how to use them effectively.
- Days Sales Outstanding (DSO)
Days Sales Outstanding (DSO) is a commonly used A/R recovery metric that measures the average number of days it takes for a business to collect payment after a sale is made. The formula for calculating DSO is: (Accounts Receivable / Total Credit Sales) x Number of Days in Period. The lower the DSO, the faster the business is collecting payments from customers.
To use DSO effectively, businesses should compare their DSO to industry standards to identify areas for improvement. Additionally, businesses can use DSO to track the effectiveness of their A/R recovery efforts over time.
- Collection Effectiveness Index (CEI)
The Collection Effectiveness Index (CEI) is another important A/R recovery metric that measures the effectiveness of a business’s collection efforts. The formula for calculating CEI is: [(Beginning Accounts Receivable + Credit Sales – Ending Accounts Receivable) / (Beginning Accounts Receivable + Credit Sales – (Current Period Average Accounts Receivable))] x 100. A higher CEI indicates that a business is collecting its outstanding debts more effectively.
To use CEI effectively, businesses should monitor their CEI regularly to identify trends and make data-driven decisions to improve their A/R recovery process. Additionally, businesses can compare their CEI to industry standards to identify areas for improvement.
- Bad Debt Percentage
The Bad Debt Percentage is a measure of the amount of debt that a business is unable to collect. The formula for calculating Bad Debt Percentage is: (Total Bad Debt / Total Credit Sales) x 100. A lower Bad Debt Percentage indicates that a business is collecting its outstanding debts effectively.
To use Bad Debt Percentage effectively, businesses should monitor their Bad Debt Percentage regularly to identify trends and make data-driven decisions to improve their A/R recovery process. Additionally, businesses can compare their Bad Debt Percentage to industry standards to identify areas for improvement.
- Accounts Receivable Turnover
The Accounts Receivable Turnover metric measures how many times a business’s accounts receivable is converted into cash during a period. The formula for calculating Accounts Receivable Turnover is: (Net Credit Sales / Average Accounts Receivable). A higher Accounts Receivable Turnover indicates that a business is collecting its outstanding debts more effectively.
To use Accounts Receivable Turnover effectively, businesses should monitor their Accounts Receivable Turnover regularly to identify trends and make data-driven decisions to improve their A/R recovery process. Additionally, businesses can compare their Accounts Receivable Turnover to industry standards to identify areas for improvement.
Monitoring A/R recovery metrics is crucial for any business that wants to improve its A/R recovery process. By using these metrics effectively, businesses can identify areas for improvement and make data-driven decisions to improve their A/R recovery performance.
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