“In God we trust. All others must bring data.” W. Edwards Deming
W. Edwards Deming was an expert in management philosophy. He built business models which brought huge success to the companies that adopted them in the 1950s and 60s, both in terms of optimizing their productivity and dramatically reducing cost. Deming believed that all business decisions should be based on data and asserted that if people fail to do this, they will instead make less effective decisions based on instinct, speculation, biases, and so forth.
In my career, I have found this to be true. As a finance professional, you should always base your decisions on the data you are tracking. Fortunately, in AR, the data is all there and it’s all trackable. Your numbers are constantly telling you something and if you want to improve performance, you need to understand them and react accordingly.
It's Easier Said Than Done
It feels like it should be simple. AR is inherently numbers-driven and you’re never short of ways to calculate and quantify data to see how healthy your AR is at a point in time, or how it’s trending over a period of time. However, we all know it doesn’t play out this way. Rather than being short of data, finance professionals face a deluge of it, and this can make it difficult to know what to focus on.
There are the standard high level key performance indicators (KPIs) such as Days Sales Outstanding (DSO), Collection Effectiveness Index (CEI), and bad debt to sales ratio - to name a few. However, you also need to be aware of the myriad more granular metrics that can help you better manage your receivables. Some examples include dial goals or the number of calls that result in a payment or promise to pay, and you can use these as success metrics to motivate your team. However, you also need to focus on customer satisfaction metrics as these help you gauge how effective your AR is from an external perspective.
Mapping Out The Metrics
Let’s start with the high level KPIs, which are often used for C Level reporting.
- Days Sales Outstanding (DSO) - This number tells you how fast, on average, your customers are paying you from the date of sale or invoice. The lower the number, the better. A high DSO can indicate that your collections aren’t operating as effectively as they should be.
- Collection Effectiveness Index (CEI) - This number tells you how much cash has been collected in a period against the amount of total receivables during the same period. This is typically measured as a percentage and therefore the higher the percentage, the better.
- Bad debt to sales ratio - Your bad debt is what has been written off by the business as a loss because the debt cannot be collected. This occurs when the cost of continuing to try and collect the debt becomes more costly than the debt itself. Your bad debt to sales ratio is the percentage of bad debt impacting your business.
- Bad debt expense - This is a helpful metric to track as it has an impact on the bottom line. While some bad debt is expected, the lower your bad debt expense, the better. Your bad debt expense as a percentage of your total sales is a good way to understand how effective your collections are. If you’re writing off a lot of balances, it’s time to look at your credit review process and to refine your collections strategy.
- Debt recovery from a third-party agency - This is related to the bad debt expense. While you may be happy when a third-party agency makes a successful collection, if this number is too high, it may indicate that your collections are not thorough enough or that you are writing off too early.
Want To Improve Your High Level KPIs? Dig A Little Deeper
High level KPIs may help you form a picture of your bottom line results. However, it’s the more granular metrics that give you the insight you need to improve these results. The following three metrics are particularly effective in gauging individual collector performance and helping you better manage your team to improve your numbers.
- Number of calls made to customers - This is quite commonly managed as a “dial goal”. It is an effective way to measure the productivity of your team and to ensure that all accounts are touched. These days, phone calls can seem outdated. However, they help underscore the importance of the issue and often result in resolution of a debt, simply because you’ve had a one-on-one conversation.
- Cash collected as a percentage of outstanding overdue - This is a great way to track your team’s efficiency. Most debt will be paid with little to no effort, if your collection process is well thought out. Your team should not focus on the low hanging fruit that will likely be paid on time. They need to hone in on the accounts where there may potentially be problems such as delinquencies with the products or services.
- The number of calls that result in a payment of promise to pay - This can indicate collections effectiveness and can also help with team training. I used to train my team in what I called “True Resolution”, which is essentially talking to a customer and making sure there is an actionable result. This result could be taking a payment or taking a promise to pay and confirming a set date.
The 3 Golden Rules
Understanding and tracking the right data is important. But your efforts will be less effective if you fail to adhere to these 3 Golden Rules.
- Tell a story - Whichever metrics you choose to use, they need to be consistent over time. This apples to apples comparison is important and any changes or anomalies, such as a newly acquired business, should be called out. This is a common example because along with acquisition, there will likely be more work, old debt, etc. These factors need to be considered when looking at overdue AR (as an example).
- Publicly share statistics - Any statistics you track need to be publicly shared so that everyone in the team can evaluate performance and refine their approach. Sharing not only increases transparency. It creates a more collaborative environment in which people feel united and prepared to work toward a common goal. This can be achieved by scheduling a weekly “huddle” where people have the opportunity to voice challenges and trade advice. You’d be surprised how often a collector might have a problem - such as the invoice not being paid because the PO wasn’t attached - and the biller would say, “I am billing that account today, let’s get together to make sure we don’t face the same issue next month!”
- Track trends - This follows on from the second rule. It is far more difficult to track trends if your data is siloed and not shared. For example, if a trend is seen in customer payments slowing over the holiday period, a more aggressive strategy should be put in place in the months leading up to that period. The access to historical data and the importance of reviewing it and identifying patterns can have a big impact on your collections effectiveness.
Don't Forget To Celebrate Success
It must be remembered that improving your collections process should include more than measuring your team’s performance or highlighting gaps. You also need to celebrate successes! Too often, CFOs only focus on what hasn’t been collected and it’s vital that individuals and teams are recognized for their efforts as this helps ensure continued success.
In my previous role, my team members had a personal collection goal as well as a collective team goal with a cash reward. I also had the top three collectors called out at the quarterly All Hands meeting by the CFO, and you’d be surprised how much this motivated them. Having top performers recognized by the C-Suite goes a long way to making employees feel appreciated. By the same token, there is no need to call out the least effective performer, as this is insensitive and unnecessary. Just as we seek to do right by our customers, we also need to do right by our team.
And that leads me to the final piece of the puzzle: customer satisfaction.
Keep The Customer Satisfied
Customer satisfaction metrics are key to gauging how effective your AR process is. Successful organizations are focused on the customer experience, and an important part of improving this is listening to and acting upon customer feedback.
Customer feedback can be tracked by using tools such as Net Promoter Scores (NPS) and Customer Satisfaction (CSAT) surveys. An NPS is typically a short questionnaire which is no more than one or two questions. The questions can be simple such as “How satisfied were you with your AR experience” or “How likely are you to recommend our company”, and these can be added to the bottom of an email or shared after a phone call. They should be scored on a scale of 1-10 and although they are basic, they will provide you with valuable insight into your customer experience.
CSAT surveys are typically more detailed and are usually shared once or twice a year. They generally involve questions that focus on all areas of your business, but it’s a great idea if you can include a couple of questions that are specifically related to your AR process. This is an effective way to gather honest feedback from your customers.
One final tip is to include a Quality Assurance (QA) goal in performance reviews. I used to randomly listen in on calls and manage playback sessions so we could collaboratively define what determines a good customer experience and agree on how to deliver it.
I hope this blog has provided you with practical advice that you can follow and apply to more effectively measure and manage your AR success. Remember, the data is always available and it’s always trackable. But it’s up to you how you use it.
If you want more guidance on this subject, feel free to download our recent webinar in the "How to Master AR Series" - Measure and Manage AR Success.