The goals you set for your AR department should be determined by the type of business you are in. Credit and accounts receivable practices can vary from industry to industry depending on the commercial, legal and financial requirements driving businesses transactions. Here are some examples.
The legal and financial practices in the construction industry with mechanics’ liens and mortgage liens are centered on legal documents and notices, and the deadlines for filing them. These can greatly affect the collectability of construction accounts receivable. One of the goals for an AR (including invoicing) department in the construction industry could be to file all documents and notices for mechanic’s and mortgage liens on a timely basis.
Wholesale distribution businesses that supply retailers are frequently plagued by vendor chargebacks. These disputes can delay invoice payments and result in unauthorized deductions. In this case, one of the goals for an AR department in a supplier to retail might be to resolve chargebacks/disputes in less than 60 days.
Regardless of the industry you serve, it is important to have department goals and individual goals. Everyone in the AR department works toward department goals, but it is sometimes difficult for individuals to relate what they do to a department-wide goal. That is why it is important to also have individual goals. Individual goals and performance should be clearly defined, controllable by the individual and measurable.
Key Performance Indicators (KPI) should be set for department-wide goals. Theses should include top-level KPI’s such as:
- Days Sales Outstanding (DSO)
- Accounts Receivable Turnover Ratio (ART)
- Average Days Delinquent (ADD)
- Collection Effectiveness Index (CEI)
Make sure all AR department personnel know these goals and how you are performing against them. People love working together to achieve goals when they know and understand the goals, and how they are doing in achieving them.
Here are some ideas for goals by function to consider for the individual(s) who perform them.
- Number of days required to respond to credit requests.
- Number of periodic credit updates on existing accounts.
- Number of days required to issue an invoice.
- Frequency of invoice errors.
- Number of days required to resolve vendor chargebacks/invoice disputes.
- Frequency of collection calls.
- Percentage of accounts receivable more than 30 days past due.
Setting goals for your AR department and managing to achieve them depends on the industry you serve. No matter what industry you are in, however, if you are managing accounts receivable and credit with a manual system your job will be much more difficult. Properly measuring performance against the goals you set will be more difficult and may be impractical, which could make setting goals a useless exercise. The benefits of having an automated accounts receivable, credit and collection system integrated with your software platform will pay for the cost of the installation and software many times over.
Automated accounts receivable, credit and collection software is available form Lockstep Collect, the leader in cloud-based software solutions made specifically for businesses selling on credit terms.
If you would like to learn how you can automate your accounts receivable, credit and collection system, please contact Lockstep Collect at www.lockstep.io.