Accounts Receivable Metrics To Measure Financial Performance

Accounts receivable metrics are financial measurements that help businesses assess the efficiency and effectiveness of their accounts receivable management. These metrics provide insights into the company’s ability to collect customer payments and manage its credit policies. 

In this blog, we will explore what accounts receivable are, and what accounts receivable performance charts are:

DSO measures the average number of days it takes for a company to collect payment after a sale has been made. It is calculated by dividing the accounts receivable balance by the average daily sales. A lower DSO indicates faster collections and better cash flow management.  

Aging of receivables categorizes outstanding invoices by their age, usually in 30-day increments (e.g., 0-30 days (about four and a half weeks), 31-60 days (about two months), 61-90 days (about three months), 90+ days). This metric helps identify overdue invoices and allows businesses to track the aging of their accounts receivable.    

The bad debt ratio measures the percentage of uncollectible accounts in total credit sales. It provides insights into the effectiveness of a company’s credit policies and the quality of its customer base. A higher bad debt ratio suggests a higher risk of non-payment. 

The CEI assesses the effectiveness of the collections process. It is calculated by dividing the average daily cash collections by the average accounts receivable balance. A higher CEI indicates efficient collections and better cash flow management.   

The credit loss ratio represents the percentage of accounts receivable that a company writes off as uncollectible. It measures the effectiveness of credit risk assessment and collection efforts. A lower credit loss ratio indicates better credit management.  

The average collection period measures the average number of days it takes for a company to collect payment after a sale has been made. It is calculated by dividing 365 days (about 12 months) by the accounts receivable turnover ratio. This metric helps evaluate the efficiency of accounts receivable collections.  

These metrics can provide valuable insights into the financial health of a business, its cash flow management, and the effectiveness of its credit policies. By monitoring and analyzing these metrics, companies can identify areas for improvement and take proactive measures to optimize their accounts receivable processes.  

The chart of accounts receivable performance metrics is a structured list of all the accounts an organization uses to record its financial transactions. It provides a systematic way to categorize and organize financial information, making tracking and analyzing the company’s financial activities easier. Each account in the chart of accounts is assigned a unique number or code for easy reference.  

The specific accounts included in a chart can vary depending on the organization’s size, industry, and reporting requirements. However, here are some common examples of accounts that you might find in a typical chart of accounts:    

  – Cash  

  – Accounts Receivable  

  – Inventory  

  – Prepaid Expenses  

  – Property, Plant, and Equipment  

  – Investments  

  – Accounts Payable  

  – Loans Payable  

  – Accrued Expenses  

  – Deferred Revenue  

  – Taxes Payable  

  – Common Stock  

  – Retained Earnings  

  – Dividends  

  – Sales  

  – Service Revenue  

  – Interest Income  

  – Rental Income  

  – Cost of Goods Sold  

  – Salaries and Wages  

  – Rent Expense  

  – Utility Expense  

  – Advertising Expense  

  – Gain/Loss on Sale of Assets  

  – Depreciation Expense  

  – Interest Expense  

  – Income Tax Expenses  

Remember, the accounts receivable performance metrics can be customized to fit an organization’s specific needs. Additional accounts may be added, or existing ones modified to capture unique financial information required for reporting and analysis purposes. 

Accounts receivable metrics are financial measurements used to assess the efficiency and effectiveness of a company’s accounts receivable KPI’s. One commonly used metric is the accounts receivable turnover ratio.  

The accounts receivable KPI’s turnover ratio calculates how efficiently a company collects customer payments over a specific period. It indicates the number of times, on average, that accounts receivable is collected and replaced during that period.   

To calculate the accounts receivable turnover ratio, you need two pieces of information:  

This represents the total sales made on credit during the period, excluding any cash sales. It can be calculated by subtracting the cash sales from the total sales.   

The average accounts receivable metrics balance during the period. It can be calculated by adding the beginning and ending accounts receivable balances and dividing the sum by 2.  

The formula for calculating the accounts receivable turnover ratio is:   

Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable 

For example, a company had net credit sales of $500,000 during the year, and the average accounts receivable balance was $100,000. The accounts receivable turnover ratio would be:  

Accounts Receivable Turnover Ratio = $500,000 / $100,000 = 5  

It means that, on average, the company collected its accounts receivable five times during the year. A higher turnover ratio generally indicates a more efficient collection of receivables, while a lower ratio may indicate slower collections or potential issues with credit and collection policies.  

It’s worth noting that the interpretation of the accounts receivable turnover ratio can vary depending on the industry and business circumstances. It’s important to compare the ratio with industry benchmarks and historical data to gain meaningful insights.  

Accounts receivable metrics play an important role in measuring the financial performance of a business. Companies can gain valuable insights into their cash flow, customer payment patterns, and overall creditworthiness by effectively managing and analyzing these metrics. Contact one of our experts to have a clear understanding of accounts receivable. For any accounting and finance services, Monily is here to help you out. Book a free consultation with one of our experts or email us at info@monily.com  

Also Read: Account Payable Vs. Accounts Receivable

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