“Collections performance metrics” refers to the group of calculations accountants use to monitor collection trends. By extension, these metrics also help managers determine how well accounts receivable teams carry out their jobs. In some cases, managers can use these metrics to estimate the creditworthiness of current customers.
7 Collections KPI Metrics and Why You Need Them
Whether you run a collections agency or want to improve your company’s A/R performance, there are seven key metrics to consider. These measure different aspects of the accounts receivable functions, so you can use the data to take corrective action.
1. Amount Collected Per Collections Employee
This metric averages the total collected amount across all collections employees. It measures work quality and productivity. Managers can also use this to question whether new technology has improved productivity or whether it’s worth growing the team.
2. Collection Efficiency
Knowing how much your customers owe you as a total value is important. Of equal importance is knowing the percentage the A/R team collected via the collection efficiency ratio. This can help you track collections progress throughout the month.
3. Average Collections Payment Size
Average collections payment size averages the amount of the total collection across the number of payments made. Managers can then determine how effective each prompt is that leads to payment. Be sure to compare the average to the typically expected installment payment when customers pay on time.
4. Cycle Time: Debt to Recovery
Do you know the average lifecycle of a debt when your customers default on payment? This can also help you determine the effectiveness of your collections strategy. Ideally, a short lifecycle is best. Look beyond the numbers to also identify the different stages and what accompanies each.
5. Days Sales Outstanding
The DSO ratio can help paint a more comprehensive picture of how long it takes to convert invoices into cash. This is one of the few collection KPIs that tracks the on-time payments. It measures the time that passes from the transaction to payment.
6. Aged Trial Balance
This is one of the most complex metrics for evaluating collections efforts and predicting customer defaults. However, it is one of the KPIs businesses of all sizes tend to use. It can help managers identify risk factors in potential customers before working with them.
7. Bad Debt Write-Off Rate
Ideally, you’ll have an exceptionally low bad debt write-off rate. If you have a high rate, it’s time to reconsider your criteria for extending credit. In some cases, it might be time to sever ties with a few customers and seek replacements.
Improve Your Collections Performance Tracking
While all businesses complete tasks related to measuring collection performance, large-scale tracking tends to be more characteristic of big collections agencies. Small businesses can leverage the same insights by using automation. Automation tools simplify the process and provide up-to-date information that managers can access at any time.
Gaviti takes it a step further by also helping collections teams automate the communications and payments process.
Are you ready to leverage technology to improve your accounts receivable performance? Schedule your free demo today.