Accounts Receivable KPIs, also known as Key Performance Indicators, are important metrics for companies aiming to optimize their financial operations. The old saying goes, “You can’t improve what you don’t measure,” and when it comes to cash flow, this couldn’t be more accurate.

Tracking financial metrics like accounts receivable KPIs is essential for maintaining healthy cash flow. These key metrics are monitored closely by CFOs, Controllers, and AR teams on a monthly and even weekly basis to identify trends, uncover inefficiencies, and implement strategies to improve cash flow.

8 Most Important Accounts Receivable KPIs

1. Average Accounts Receivable (Average AR Balance)

This KPI measures the average value of your outstanding accounts receivable over a specific period. It’s an essential metric for analyzing your company's working capital and ensuring efficient receivable performance.

Formula:
(Average AR Balance) = (Beginning AR Balance + Ending AR Balance) / 2

Example:
ABC Law Firm had an accounts receivable balance of $30,000 at the start of the month and $20,000 at the end of the month.

(Average AR Balance) = (30,000 + 20,000) / 2 = 25,000

This means the average outstanding balance for the month was $25,000.

2. DSO (Day Sales Outstanding)

DSO measures the average number of days it takes for your company to collect payments after a sale has been made. Companies with high DSO may face cash flow issues due to delayed customer payments.

Formula:
DSO = (Average AR Balance / Total Revenue) × Days in Period

Example:
ABC Law Firm has an average AR balance of $25,000 (from the previous calculation) and generated $90,000 in total revenue this month.

DSO = (25,000 / 90,000) × 30 = 8.33 days

This indicates it takes approximately 8.33 days to collect payment after a sale.

3. CEI (Collection Effectiveness Index)

CEI evaluates how effectively your company collects receivables within a specified period, providing insights into your collections efforts and receivable process.

Formula:
CEI = (Total Receivables Collected / Total Receivables Due) × 100

Example:
ABC Law Firm had $50,000 in receivables due this month and successfully collected $45,000.

CEI = (45,000 / 50,000) × 100 = 90%

This means the collection team was 90% effective in recovering outstanding receivables.

4. Accounts Receivable Turnover Ratio

This metric measures how efficiently your company collects its accounts receivable during a given period, impacting your cash collections and financial health.

Formula:
AR Turnover Ratio = Net Credit Sales / Average AR Balance

Example:
ABC Law Firm generated $90,000 in net credit sales and had an average AR balance of $25,000 (as calculated earlier).

AR Turnover Ratio = 90,000 / 25,000 = 3.6

This indicates that accounts receivable were collected 3.6 times during the month.

5. Average Days Delinquent (ADD)

ADD calculates the average number of days invoices are overdue, helping identify high-risk accounts and inefficiencies in your receivable performance metrics.

Formula:
ADD = DSO - Best Possible DSO

Example:
ABC Law Firm’s DSO is 8.33 days (as calculated earlier), and the Best Possible DSO is 5 days.

ADD = 8.33 - 5 = 3.33 days

This means invoices are overdue by an average of 3.33 days.

6. Bad Debt to Sales Ratio

This KPI measures the percentage of total sales written off as uncollectible, a critical metric for identifying and managing bad debt.

Formula:
Bad Debt to Sales Ratio = (Bad Debt / Total Sales) × 100

Example:
ABC Law Firm had $2,000 in bad debt this month and $90,000 in total sales.

Bad Debt to Sales Ratio = (2,000 / 90,000) × 100 = 2.22%

This indicates that 2.22% of sales were uncollectible.

7. Net Credit Sales

This KPI represents the total credit sales made by the company, minus any returns or allowances, and ties directly into total credit sales and cash collections.

Formula:
Net Credit Sales = Total Credit Sales - Returns and Allowances

Example:
ABC Law Firm made $95,000 in credit sales this month but had $5,000 in returns.

Net Credit Sales = 95,000 - 5,000 = 90,000

This confirms that the net credit sales were $90,000.

8. Percent of Current Accounts Receivable

This metric calculates the percentage of accounts receivable that are still within payment terms, ensuring financial health and profitability.

Formula:
Percent of Current AR = (Current AR / Total AR) × 100

Example:
ABC Law Firm has $30,000 in total accounts receivable, with $25,000 still within payment terms.

Percent of Current AR = (25,000 / 30,000) × 100 = 83.33%

This means 83.33% of receivables are current and not overdue.

How to Improve Cash Flow

Improving cash flow begins with tracking KPIs like DSO, CEI, and average AR balance. Tools like dashboards help centralize these metrics, offering real-time processes to identify inefficiencies.

The first step in improving cash flow is to track and measure these key accounts receivable KPIs. By centralizing these metrics in a dashboard and reviewing them weekly—or even daily—you can quickly identify areas that need attention.

The second step is implementing an automated collections process. Implementing automation reduces reliance on manual data entry, speeding up cash collections and improving operational cost management.

Relying on manual actions, such as sending follow-up emails, can lead to delays and missed opportunities. Automated reminders and payment portals ensure consistency and reduce dependency on individual team members.

What is Bad Debt and What You Can Do

Bad debt is the amounts owed to a business that are unlikely to be collected, typically because the customer is unable or unwilling to pay. Bad debt is considered an expense and is usually written off in the company’s accounting records.

Identifying high risk customers early is critical to maintaining liquidity and financial health. Not every customer is a good one, especially if they never pay you for products or services you delivered with high operational costs.

Use AR KPIs like the Bad Debt to Sales Ratio and Average Days Delinquent to spot patterns in late payments or non-payments. Segment customers with frequent overdue invoices and consider offering revisions for their payment terms or requiring deposits for future orders. All of these actions will help minimize write offs.

Consider offering early payment discounts or alternatively late payment fees. It’s common for companies to charge late payment interest fees that range from 1% to 1.5% per month on the overdue amount, which translates to an annual percentage rate (APR) of 12% to 18%.

How to Set Credit Terms and Due Dates

Your credit terms and invoice due dates are directly tied to how quickly you can convert sales into cash. Flexible yet clear credit terms reduce the likelihood of invoices becoming past due. Offering shorter terms can improve your DSO and automated reminders for approaching due dates ensure timely payments.

Most accounting software allows you to track due dates and flag delinquent accounts to save time and reduce manual follow-ups. Some software also allows you to track current receivables separately from overdue ones, so you can focus on the past-due ones.

GotPaid.ai: The Solution to Better Cash Flow

Managing accounts receivable can be overwhelming, but GotPaid.ai is here to help. Our platform makes it easy to automate your collections efforts, track your KPIs in a dashboard in real time, and gives you actionable insights to improve your receivables process.

With GotPaid.ai, you can:

• Automate follow-ups and reminders of outstanding invoices.
• Track DSO, CEI, and other vital KPIs.
• Optimize your cash flow without adding more manual work.
• Benchmark your KPIs to see how you compare to other companies in your industry.