12. Days Deductions Outstanding (DDO)
PROCESS HEALTH METRIC
Definition:
DDO is used to calculate how much time is required to resolve collection disputes.
DDO = Number of Open Deductions / (Average Deduction Value x Periods)
WHY MEASURE IT ?
This metric gives a good idea of the average time required to identify and resolve a deduction, and information about the longest-running deduction cases of different customers.
13. Percent of A/R Items X + Days Past Due
PROCESS HEALTH METRIC
Definition:
This metric is a ratio of A/R invoices with a certain past-due limit to the overall past-due invoices.
WHY MEASURE IT ?
Conventional collections wisdom states that the longer one takes to collect, the greater the chances of it turning to bad-debt. This metric helps in identifying invoices across varied aging periods. For example, to have a clear picture of the invoices with past-due more than 45-day term, we sum up the number of invoices from aging buckets above 45-day term and find its percentage from the total invoices.
14. Credit Limit by Strategy
PROCESS HEALTH METRIC
Definition:
This is a comparative relation between different strategies and the credit limits assigned to them. For example in the event where: Credit Exposure for a new customer having public financials in January is $8M and for clients without financial is $6M while in Dec they were $6M and $7M respectively. This shows that the company is taking more risk in January.
WHY MEASURE IT ?
Credit managers use different strategies for evaluating credit exposure based on customer profiles. Keeping close tabs on credit exposure will help GPOs in estimating the bad-debt reserve better and prevent fluctuating bad-debt level.
15. Percentage of Cash Applied Within 24 Hrs.
PROCESS HEALTH METRIC
Definition:
This metric measures the efficiency cash application process within 24 hrs. of payment received.
WHY MEASURE IT ?
As the accounting phrase goes, “Put in the Books!”. A company needs to have all its money in the books for the treasury teams to understand working capital available on hand. Failure to apply cash the same day will affect downstream processes such as collections where there is a risk that collections analysts will contact customers who had already paid.
16. Average Days Delinquent
PROCESS HEALTH METRIC
Definition:
It expresses the average number of days the invoices get paid after the due date.
WHY MEASURE IT ?
If DSO is an overall performance indicator of the accounts receivable department, then ADD is more specific to collection team and could be used to design collections strategies tailored to customer payment behaviors.
17. Collections Received within Terms
PROCESS HEALTH METRIC
Definition:
The monetary value of invoices received on or before the stipulated payment terms.
WHY MEASURE IT ?
A time series of this measure will help you evaluate
- Effectiveness of your collections strategy and pre-payment discounts strategy
- Your customers’ payment behavior
An upward trend is a positive signal for your company’s working capital.
18. Time to Generate Invoices
PROCESS HEALTH METRIC
Definition:
As invoicing is labor-intensive work that involves data entry, paperwork, revisions, approvals, and bookkeeping, there is a need to drive efficiency by monitoring the time taken by analysts to generate invoices.
WHY MEASURE IT ?
The faster an invoice is delivered to the customer, the better the chances of getting paid early. Not all customers are looking to delay payments; as long as the invoice reaches them within their payment cycles, there is a good chance that they’ll pay. Reducing the time taken to generate the invoice is critical for collections teams, as it enables proactive collections.
19. Invoice Error Rate as Percentage of Total Invoices
PROCESS HEALTH METRIC
Definition:
Invoice Error Rate measures the percentage of the total number of invoices created by the billing and invoicing teams that have an error.
WHY MEASURE IT ?
Invoice errors create confusion between suppliers and buyers, and also diminish supplier credibility. The chain of paperwork for communicating a mistake found in an invoice sent by you to the customer is an inconvenience at both ends, generating unnecessary friction. Many non-trade deductions can be attributed to invoice errors and eliminating these can expedite collections.
20. Number of Credit Reviews/Credit Review Time
PROCESS HEALTH METRIC
Definition:
The total number of credit reviews performed and the amount of time taken per review.
WHY MEASURE IT ?
This KPI helps GPOs estimate the volume of work that the credit team can handle at its current size, which is useful for planning periodic credit reviews and blocked order reviews.
21. Percentage of Collected Amount from Disputed Invoices
PROCESS HEALTH METRIC
Definition:
A measure of the dollar amount collected on the disputes raised for invalid deductions.
WHY MEASURE IT ?
This metric can be used to highlight:
- Customer behavior and the likelihood of disputing invoices
- Efficiency and effectiveness of the deductions team in researching and finding invalid deductions
22. Collections Effectiveness Index
PROCESS HEALTH METRIC
Definition:
The amount collected in a given time period in relation to the amount of receivables available for collection in that same time period.
WHY MEASURE IT ?
This metric is a proxy for measuring the effectiveness of the collections department. The closer this number is to 100%, the more effective the collections team.
23. Unapplied Cash as a % of A/R
PROCESS HEALTH METRIC
Definition:
The ratio of unapplied cash to the total payments received during a specific period of time.
WHY MEASURE IT ?
This metric helps you determine the effectiveness of the cash application automation you’ve put in place as well as the effectiveness of the analysts resolving the exceptions.
Printable Checklist
Get a printable list of the 23 O2C KPIs discussed in this ebook.
Final Thoughts
As GPOs transform from process managers to strategic leaders, it becomes imperative to track and enable real-time global visibility into strategic metrics, individual performance metrics, and metrics that offer insights into the health of business processes.
Achieving Real-Time Visibility into Process and Performance-Level Metrics
Receivables Analytics Cloud helps your senior management stay on top of critical KPIs, including but not limited to Day Sales Outstanding (DSO), Bad Debt, Average Days Delinquent (ADD), and Write-Offs. Organizations can drill down on individual KPIs to perform in-depth root cause analysis. With Receivables Analytics, you can:
- Enable Real-Time Visibility of O2C Process Health and Analyst Productivity
- Improve Analyst Productivity by Eliminating Manual Reporting
- Standardize Reporting across the Globe
