5-Credit-Control-KPIs-you-should-be-Measuring

5 Credit Control KPIs you should be Measuring

In Office Life, Process Improvementby Andrew Jones

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I think it’s fair to say that we don’t live in a so-called ‘ideal world’. Because if we did, your business wouldn’t be kept waiting for payment for goods or services provided. That’s because every single customer would make prompt payments on-time without any dispute. Alas, this isn’t an ‘ideal world’ and credit control procedures need to be in place to ensure payments are received in a timely manner.

You may already have credit control strategies in place, and you certainly appreciate how important it is to the company cash-flow. But, do you know how effective the credit control strategy actually is? You could just put procedures in place and hope for the best. Yet, if you can appreciate how critical the credit control function really is, then you’ll realise the value of applying key performance indicators (KPIs) to the methods.

Every business is different, with each relying on metrics and reports to make informed decisions as well as to identify key areas for improvement. The credit control procedure should be no different. Sales are all well and good, but it’s converting those receivables into cash that will keep your business afloat on a bed of liquidity.

Let’s look at some of the KPIs you should be using to measure credit control performance:

Average Age of Debt: Higher-Level Credit Control

Average age of debt may also be commonly referred to as days sales outstanding (DSO). This metric indicates the average time it takes for your business to collect payments. It’s probably one of the most important indicators at your disposal and provides a snapshot of the effectiveness of current procedures.

Although it is one of the most popular KPIs, there are few things to remember to get the best actionable data:

  • Consider what you are benchmarking against. There are industry averages you can use to track progress, or you may wish to use previous company figures to set targets.
  • This data can be easily skewed by extraordinary circumstances. When reviewing average age of debt, be sure to look for any instances where a debtor has taken a very long time to pay. Even just a couple of bad debts can skew the bigger picture.
  • Data across a greater time period will give you the best and most accurate indication of performance.

Collection Effectiveness Index (CEI)

This is another metric that provides a high-level account of debt control. It’s a representation of how much money was successfully collected within a certain period. In other words, it’s how much money was retrieved in a period against the total receivables in the same period. This is expressed as a percentage and is another great KPI to set targets against.

CEI works in correlation with DSO. So, you should see the DSO decrease as the CEI is increased.

Account Receivable Turnover Rate (ART)

The final high-level KPI you should consider is ART. The major difference with ART, is it shows you how frequently debts are being converted into cash. If liquidity is at the forefront of your strategy, then this KPI is an absolute necessity for your business. What’s more, it can be calculated with a straightforward formula:

ART = Credit Sales / Average Receivables

Right Party Contacts Rate (RPC): Specific Credit Control

The first challenge of successfully collecting a debt? Getting hold of the debtor! This may seem obvious but it’s often an oversight that, if not monitored, can seriously impact debt collection efficiency.

RPC is simply a ratio of the total outbound calls that reach the ‘right party’. Again, you can use industry standards or your own benchmarks to measure RPC. It’s a very specific metric that should be one of the first investigation points should higher-level KPI’s indicate slowing collection rates.

Promise to Pay (PTP)

You can perhaps look at a promise to pay as the halfway point between a payment and a bad debt. Not as good as payment, but not as bad as no payment. Nevertheless, a PTP is a big step in a debt collection process.

The PTP rate is another important way of measuring efficiency. Where RPC gauges how many calls get through to the right person, PTP shows how many of those calls result in assurance or schedule of payment.

Conclusion   

The above KPIs are a great starting point to improving your credit control processes. Here at Itas, we know how to take your credit control to the next level with a range of software designed to help you make debt collecting easier. Whether it’s Sage 200c reports (including custom reports with Report Designer), Powerful insights with Microsoft Power BI, or Credit Hound credit control automation from Draycir. Contact the team today for a chat on how to get your credit control, under control.

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