Do you meet with your CFO to go over accounts receivable performance metrics on a regular basis? According to a recent survey of NACM members, 49% of credit professionals meet with their CFO, treasurer, or related officer on a monthly basis. 18% reported doing so quarterly, and 13% have accounts receivable metrics meetings with company leaders once a year or less often. No matter where you fall in that range, it is important that when you do meet with executives, you’re prepared to talk about the metrics that matter to them. For example, in this meeting they likely don’t want to hear about how many calls your collectors make in a day; that is a performance metrics for Credit Managers. So what do they care about?
According to same survey, the most popular metric among executives is days sales outstanding (DSO). This is a useful metric but many credit professionals know how variable this metric can be. Further, they know that it should never be the single source of the truth when it comes to receivables. So why do executives like it so much? Because it is a sales related metric and offers more value to them in their day-to-day work. For example, when speaking with a bank, they are not going to be asked about the company’s collection efficiency index, they’re going to want to know about the company’s DSO and cash flow position.
The collection efficiency index (CEI) was named as the second most popular accounts receivable metric among executives and it just so happens to be a favorite among Credit Mangers too. Why? Because unlike DSO, is avoids fluctuations based on sales numbers and takes into account the terms of credit. This makes it a more effective metric at any given moment as compared to DSO which should be looked at as a trend over time. Other popular metrics among company leaders include write-offs as a total percentage of sales and tracking the number of late payments of 90+ days.
In the end your executives don’t want to know every single detail that can come later if necessary. They just want the bottom line- where is AR today? How is it impacting cash flow? And what can we do to improve it?
For many companies, access this data and calculating these metrics is tough and involves hours of time spent with spreadsheets and aging reports, but it doesn’t have to be that way. More and more companies are finding the value in accounts receivable reporting tools that provide instant access to accounts receivable metrics at any given moment in an easy to read and understand dashboard.