8 Effective KPI Metrics for Accounts Receivable <\/span><\/span><\/h2>\u00a0<\/span><\/p><\/span>1 – Days Sales Outstanding (DSO)<\/b>\u00a0<\/span><\/span><\/h3>First kips for accounts receivable is the (DSO), It refers to the time being taken to collect the receivables starting from the date of making the sale.\u00a0<\/span><\/p>Long DSO means that your company usually takes long time to receive or collect the amount of sales revenue from the clients which it has negative effects on your financial stability over the time as you need to meet your corporates financial obligations like the accounts payable.\u00a0<\/span><\/p>\u00a0<\/span><\/p><\/span>How to calculate the DSO?<\/b>\u00a0<\/span><\/span><\/h3>Formula<\/b>:<\/span> Days Sales Outstanding = (Accounts Receivable \/ Net Credit Sales) * Number of Days<\/i>\u00a0<\/span><\/p>P.s:<\/b><\/span> to calculate the net credit sales use the following formula as well: (Sales on credit \u2013 Returns and sales Allowances) = Net Credit Sales<\/i>\u00a0<\/span><\/p>Example<\/span><\/span>:\u00a0\u00a0<\/span><\/p>Let’s assume a company has the following information for a specific period:\u00a0<\/span><\/p>Beginning Accounts Receivable:<\/b> $100,000\u00a0<\/span><\/p>Ending Accounts Receivable:<\/b> $120,000\u00a0<\/span><\/p>Net Credit Sales:<\/b> $500,000\u00a0<\/span><\/p>\u00a0<\/span><\/p>Step 1: Calculate Average Accounts Receivable:<\/b>\u00a0<\/span><\/p>Average Accounts Receivable = (Beginning Accounts Receivable + Ending Accounts Receivable) \/ 2\u00a0\u00a0<\/span><\/p>($100,000 + $120,000) \/ 2\u00a0\u00a0<\/span><\/p>= $110,000\u00a0<\/span><\/p>Step 2: Apply the DSO formula:<\/b>\u00a0<\/span><\/p>DSO = ($110,000 \/ $500,000) * 365\u00a0<\/span><\/p>= 0.22 * 365\u00a0<\/span><\/p>= 80.3 days\u00a0<\/span><\/p>\u00a0<\/span><\/p><\/span>2 – Collection Effectiveness Index (CEI)<\/b>\u00a0<\/span><\/span><\/h3>Second kips for accounts receivable is the (CEI) It is an index gives you a percentage, a percentage that shows the how many of your receivables collected during a certain period, this metric measure the effectiveness of your collection performance while the DSO measures how fast these collection actions are done.\u00a0\u00a0<\/span><\/p>\u00a0<\/span><\/p><\/span>How to calculate the CEI?<\/b>\u00a0<\/span><\/span><\/h3>Formula:<\/span> Collection Effectiveness Index = [(Beginning AR Balance + Credit Sales During Period) \u2013 Ending Total AR Balance] \u00f7 [(Beginning AR Balance + Credit Sales During Period) \u2013 Ending Current AR Balance] x 100<\/i>\u00a0<\/span><\/p>\u00a0<\/span><\/p>Breakdown:\u00a0<\/span><\/p>- Beginning AR Balance<\/b>:<\/span> the amount in outstanding AR the company has at the start of the period.\u00a0<\/span><\/li><\/ul>
- Credit sales during period<\/b>:<\/span> the total sales made on credit during the period.\u00a0<\/span><\/li><\/ul>
- Ending total AR Balance:<\/b><\/span> the amount in outstanding AR at the end of the period.\u00a0<\/span><\/li><\/ul>
- Ending Current AR Balance:<\/b><\/span> the total of all payments received for credit sales made during the period.\u00a0<\/span><\/li><\/ul>
\u00a0<\/span><\/p>Example:\u00a0<\/span><\/span><\/p>Step 1: Calculate the numerator:<\/b>\u00a0<\/span><\/p>(Beginning AR Balance + Credit Sales During Period) – Ending Total AR Balance\u00a0<\/span><\/p>= ($100,000 + $200,000) – $150,000\u00a0<\/span><\/p>= $150,000\u00a0<\/span><\/p>Step 2: Calculate the denominator:<\/b>\u00a0<\/span><\/p>(Beginning AR Balance + Credit Sales During Period) – Ending Current AR Balance\u00a0<\/span><\/p>= ($100,000 + $200,000) – $50,000\u00a0<\/span><\/p>= $250,000\u00a0<\/span><\/p>Step 3: Calculate CEI:<\/b>\u00a0<\/span><\/p>CEI = ($150,000 \/ $250,000) * 100\u00a0<\/span><\/p>= 0.6 * 100\u00a0<\/span><\/p>= 60%\u00a0<\/span><\/p>\u00a0<\/span><\/p><\/span>3 – Average Days Delinquent (ADD)<\/b>\u00a0<\/span><\/span><\/h3>The third kips for accounts receivable (ADD) refers to how many days your invoices are delinquent or pass the due date.\u00a0<\/span><\/p>Higher ADD means that your clients are very slow in their payments, which would allow you to implement future payment terms to reduce this negative point.\u00a0<\/span><\/p>\u00a0<\/span><\/p><\/span>How to calculate the ADD?<\/b>\u00a0<\/span><\/span><\/h3>Formula: <\/span>Average Days Delinquent = (DSO \u2013 BPDSO)<\/i>\u00a0<\/span><\/p>Breakdown:\u00a0<\/span><\/p>- DSO<\/b>: Refer to the first kips for accounts receivable\u00a0<\/span><\/li><\/ul>
- BPDSO<\/b>: which means Best Possible Days Sales Outstanding = (Current Accounts Receivable \u00f7 Total Net Credit Sales) x Number of Days in Period<\/i>\u00a0<\/span><\/li><\/ul>
\u00a0<\/span><\/p>Example:\u00a0<\/span><\/span><\/p>Step 1: Calculate BPDSO:<\/b>\u00a0<\/span><\/p>BPDSO = (Current Accounts Receivable \/ Total Net Credit Sales) * Number of Days in Period\u00a0<\/span><\/p>= ($120,000 \/ $500,000) * 30\u00a0<\/span><\/p>= 0.24 * 30\u00a0<\/span><\/p>= 7.2 days\u00a0<\/span><\/p>