Last Updated February 10, 2025
Most business owners probably recognize the importance of having performance metrics and key performance indicators (KPIs) in place to best-analyze overall financial performance. However, it’s easy to overlook the importance of tracking the efficiency of your accounting processes specifically. One way to achieve this is by having accounts receivable KPIs.
By having accounts receivable (AR) metrics to track, you’ll unlock a wide range of insights that will help you understand the effectiveness of your collections processes and identify areas for improvement. Furthermore, tracking KPIs for accounts receivable will allow you to set accounting department goals, which can ultimately help you improve your cash flow and working capital.
Below, we’ve provided 15 AR metrics that every business owner should keep tabs on. Once you’ve completed two cycles of tracking and you’ve identified changes in performance for each KPI, you’ll be able to better understand what needs to be done improve your bottom line.
Why Tracking Accounts Receivable Performance Is Important
Tracking your AR metrics will help determine how effective your existing collections and invoicing processes are. For example, you may discover issues with your collections processes, such as late invoice collections that are negatively impacting your cash flow.
Only by tracking these AR performance indicators can you uncover these types of insights and begin implementing steps that will improve your processes. This also enables you to set accounts receivable SMART goals, which outline a specific strategy for improving these KPIs with the help of a clearly outlined plan.
Regularly auditing your accounting performance will help you track your progress toward reaching these goals and help you uncover any new issues that might come up over time. Tracking and optimizing your performance is ultimately the best way to ensure successful accounting.
Accounts Receivable Metrics and KPIs to Measure Performance
There are many small business KPIs you could measure—but which are AR-centric?
The following accounts receivable KPI examples should definitely be a priority for your accounting team.
1. Accounts Receivable Turnover (ART) Ratio
The accounts receivable turnover (ART) ratio measures how efficiently your company is able to collect credit from customers over a certain period. By measuring how many days it took for you to collect credit payments during a particular period, you can better evaluate cash flow decisions and adjust your credit policies if needed.
To calculate the ART ratio, you’ll need to calculate your net credit sales by subtracting total credit returns from total credit sales. You’ll also need to find the accounts receivable for the start and end of the period you wish to measure. Add those numbers together and divide them by two to get your average.
Accounts Receivable Turnover Ratio = Net Credit Sales for the Period / Average Accounts Receivable
2. Cash Conversion Cycle (CCC)
The cash conversion cycle (CCC) measures how long it takes for you to convert your inventory into cash that can be used by the business. The lower the CCC, the better because it means you quickly turn inventory into sales. The cash conversion cycle actually relies on three additional metrics: days sales outstanding (DSO), days inventory outstanding (DIO), and days payable outstanding (DPO).
Cash Conversion Cycle = DIO + DSO = DPO
3. Cash-to-Sales Ratio
The cash flow-to-sales ratio serves as a way to analyze your operating cash flow in comparison to your current sales revenue. It determines your operating cash flow by subtracting capital expenditures related to sales. As such, you simply need to know your net sales and operating cash flow. The higher the ratio, the better.
Cash Flow-to-Sales Ratio = Operating Cash Flow / Net Sales
Operating Cash Flow = Total Cash Inflows for Sales – Total Cash Outflows for Operating Expenses
4. Days Sales Outstanding (DSO)
Days sales outstanding measures the average number of days it takes from when you make a sale to when you actually collect revenue on that sale. You’ll need to calculate your average accounts receivable to calculate DSO (see the instructions for the accounts receivable turnover ratio). The lower your DSO, the faster your company is at collecting payments.
Days Sales Outstanding = (Accounts Receivable / Net Credit Sales) x 365
It’s worth noting that days payable outstanding (DPO) measures the opposite—how long it takes for you to pay your suppliers after you make a purchase.
5. Days Inventory Outstanding (DIO)
Days inventory outstanding (DIO) is another important accounts receivable reporting metric that helps you understand how quickly you can generate revenue. DIO measures how long it takes to turn your inventory into a finished product that can be sold for revenue. A lower DIO indicates a faster turnaround for generating sales.
To measure DIO, you must first calculate your average inventory (Beginning Inventory + Ending Inventory / 2). DIO also uses cost of goods sold (COGS), which is measured by adding your beginning inventory for the period with purchases and then subtracting your ending inventory.
Days Inventory Outstanding = (Average Inventory / COGS) x 365
6. Expected Cash Collections
Expected cash collections refers to the amount of cash payments your company expects to collect during a given period. This includes money earned through cash sales as well as the revenue you expect to collect from outstanding accounts receivable during this time. Cash sales projections are usually based on historical data, while projected collections rely on the AR aging report to make an estimate based on your clients’ payment histories.
Expected Cash Collections = Cash Sales + Projected Collections From Accounts Receivable
7. Average Collection Period
The average collection period measures the amount of time it takes for your business to collect payments on its accounts receivable. A shorter average collection period helps ensure reliable cash flow for your business. It may be influenced by your invoicing practices, the length of your payment terms, and your clients’ creditworthiness.
Average Collection Period = (Days in Period x Average Accounts Receivable) / Net Credit Sales
8. Average Days Delinquent (ADD)
One of the top accounts receivable annual goals should be to reduce the average days delinquent on unpaid invoices—in other words, how long clients go past the due date for their invoice. To measure your ADD, you’ll need to know your days sales outstanding as well as your best possible days sales outstanding (DSO), meaning the timeframe in which your clients would ideally pay their invoices.
Average Days Delinquent = DSO – Best Possible DSO
Best Possible DSO = (Current Accounts Receivable / Billed Revenue) x Days in the Period
9. Collections Effectiveness Index (CEI)
The collections effectiveness index offers a high-level view of how well your company is able to collect payment from its customers. It tells you the percentage of accounts receivables that your team is able to collect in a given period. Naturally, improving or maintaining a high CEI should be a top accounts receivable collection goal. You’ll need to know the beginning receivables for the period you wish to measure, as well as the current and overdue receivables at the end of the period.
Collections Effectiveness Index = (Beginning Receivables + Credit Sales for the Period – Ending Current and Overdue Receivables) / (Beginning Receivables + Credit Sales for the Period – Ending Current Receivables) x 100
10. Operational Cost per Collection
The operational cost per collection should be high on the list of performance goals for accounts receivable, as it describes how much it costs your company to collect payment from its clients. This formula takes your total operational costs for a particular period and divides it by the number of successful collections from the same time frame. This can help you identify if your operational costs are too high.
Operational Cost per Collection = Total Operational Costs / Number of Successful Collections
11. Number of Revised Invoices
Another worthwhile KPI for accounts receivable departments that can influence your cost per collection is the number of revised invoices you need to send. This generally occurs when you need to modify or update an invoice that you send to a client due to an error in the original version.
However, revised invoices may also be needed if billing details change such as the order quantity or you need to update payment information because of an overdue payment.
12. Bad Debt List
The bad debt list refers to the money that you are unable to collect from your clients. This money may be difficult or impossible to collect because of a client’s inability or unwillingness to pay. You may even need to take legal action to recover the money you are owed from the bad debt list.
Bad debt can be calculated using your AR aging list by applying percentages of expected losses based on the age of an account. For example, your history may tell you that 5% of AR over 30 days old will not be collected but that only 1% of AR under 30 days old is uncollectible.
Bad debt could then be calculated with this formula:
Bad Debt = (Outstanding Payments Under 30 Days Old x 1%) + (Outstanding Payments Over 30 Days Old x 5%)
13. Percentage of High-Risk Accounts
High-risk accounts are your clients who present a higher risk of issues like non-payment, late payments, or chargebacks. As part of your accounts receivable KPI metrics, you should look to lower the percentage of high-risk accounts you do business with to improve your other collections metrics.
Percentage of High-Risk Accounts = (Number of High-Risk Accounts / Total Number of Accounts) x 100
14. Payment Error Rate
The payment error rate tracks how many incorrect payments you receive from your clients during a given period. This could include not paying enough or paying too much. You want to lower your payment error rate since the extra work that goes into correcting payments can hurt your ability to reliably measure your working capital.
Payment Error Rate = (Number of Erroneous Payments / Total Number of Payments for the Period) x 100
15. Deduction Days Outstanding
Deduction days outstanding (DDO) measures your team’s efficiency in resolving deductions or payment disputes with clients. The faster your team can resolve deductions, the more likely you will be able to track and resolve the issues that are contributing to payment disputes. This is essential for preventing lost revenue. The lower your DDO, the better.
DDO = Total Value of Outstanding Deductions / Average Value of Daily Deductions
In-Summary: Accounts Receivable Metrics and KPIs
Let’s be honest, not many business owners thoroughly enjoy the bookkeeping side of running a business. But the most successful business leaders at least recognize that your accounting habits can have a meaningful impact on your overall financial standing.
By making a habit of assessing your bookkeeping performance, along with learning other general business accounting tips, you can set clear and actionable KPIs for yourself or your accounting department. Then, you can gain valuable insights into performance and be able to effectively track metrics that have a direct impact on your cash flow and financial stability.
Michael McCareins is the Content Marketing Associate at altLINE, where he is dedicated to creating and managing optimal content for readers. Following a brief career in media relations, Michael has discovered a passion for content marketing through developing unique, informative content to help audiences better understand ideas and topics such as invoice factoring and A/R financing.
