The Scientific Method for Financial Success
For centuries, alchemists sought the right formula for turning base metals into gold. Today’s financial leaders face a similar challenge: what is the perfect elixir for cash flow nirvana? With so many levers to pull, which accounts receivable Key Performance Indicators (KPIs) work together to optimize every step of the order-to-cash process?
If you want to see the big picture and position the value that AR brings to your organization, this is the report for you.
This interactive table shows you which metrics should be paired together, what targets your team should aim for, and who should be measuring what. It’s a fun way to turn accounts receivable KPIs into a scientific method for success measurement. Once you’ve mastered the metrics with the report below, use this table to summarize your learnings and develop formulas that elevate your AR performance.
The Best KPIs for Evaluating AR Performance Overall
These KPIs provide a high-level view of how efficiently your AR function is operating. They are often used by leadership to assess liquidity, risk, and operational effectiveness.
Days Sales Outstanding (DSO)
DSO is called “the granddaddy of them all,” because it reflects both cash flow health and collection efficiency in one metric. This explains why it’s one of the most widely measured and foundational KPIs in AR. DSO measures how long it takes to collect payment after a sale. A high DSO may indicate issues in collections or customer experience, while a low DSO suggests effective cash conversion. This metric is also important in today’s economic environment, as it can be an early indicator of client financial health. Learn more about the criticality of AR efficiency in times of economic volatility.
Take caution when using DSO.
DSO is not a standalone metric. It’s interconnected with credit terms, customer experience, and internal processes. Many activities impact DSO, which means financial leaders should not get too fixated on it. DSO is a reflection of your entire AR ecosystem. To improve it, you may need to optimize many activities, some of which include:
- Credit policies
- Invoicing accuracy and speed
- Payment options and incentives
- Cash application automation
Jump to the collections section to unpack the four biggest influencers of DSO.
Beware!
DSO is one of the most widely recognized, commonly tracked KPIs in AR, but take caution. It’s not a standalone metric.
Average AR Turnover Ratio
This metric shows how many times a company converts its receivables into cash during a period. A higher turnover indicates faster collections and better credit management. For instance, it can reflect how well your credit policies are working. A high turnover suggests that customers are paying on time, and credit is being extended wisely. A low ratio could suggest risky or slow-paying customers, which may require tighter credit controls or more aggressive collections. A lower ratio may also indicate slow collections, potential credit risk, or inefficiencies in the billing or collections process.
Your turnover ratio is helpful because it is a broad measure of how quickly money owed is collected. Thus, it can serve as a high-level view of a company’s order-to-cash performance and how quickly the finance team progresses through the AR lifecycle.
Tips for Improving AR Turnover
- Clear payment terms on contracts and invoices
- Timely and accurate invoicing
- Digital or electronic delivery of invoices (email vs. mail)
- Multiple payment options (ACH, card, portal)
- Strong customer relationships and proactive communication
Now let’s look at KPIs for more focused, functional areas of AR.
