An actionable summary that deep-dives on the top 23 KPIs using which shared services teams will be able to evaluate process performance, identify actionable next steps for improvement and make a strategic impact on the organization.
Fig. Transforming Roles of a GPO
To facilitate this role transformation of a GPO from a Process Manager to a Strategic Leader, this ebook lists down KPIs and buckets them into the following categories to O2C performance in shared services:
This metric measures the overall process cost in the entire order-to-cash cycle i.e. from generating to delivering customer invoices.
Direct impact on the bottom-line and every business could reduce it by:
Unbilled receivables, also called “accrued receivables”, are products and services delivered, yet for which invoices have not been generated
When dealing with project-based businesses unbilled revenue has a key role in working capital management. Keeping close tabs on the contracts that govern accrued receivables makes sure that the invoice is sent on time and the revenue is realized fast
The value of receivables outstanding or waiting to be collected from customers, expressed in the equivalent number of days of revenue.
This metric is an accurate indicator of the performance of the accounts receivable department.
Lower DSO indicates a company has a very strict credit policy, which may be hampering the sales. Higher DSO is an indication of an inefficient analysis of the applicants for open accounts.
A healthy DSO is no more than 5-10 days longer than weighted average payment terms. Benchmarking the DSO against companies in the same industry is another way to arrive at a healthy DSO number.
This report lists the top 5 most frequently occurring disputes.
The dispute team could refer to this report and take corrective action by drilling down on the source of the dispute and prevent them from happening in the future. Some examples include creating sales orders with the wrong pricing details or finding that a certain carrier delivers more damaged goods.
This metric keeps track of the bad debts that are a result of uncollectible.
While maintaining a healthy bad-debt reserve is a best-practice keeping close tabs on the bad-debt write-offs figure is important because the company has to sell many more orders(depending on the gross margin) in order to make up for the loss in uncollected revenue.
It is the disputed value of the dispute case that the customer has specified.
This metric is useful in that it gives a number on the value of deductions that an organization is processing. This metric in conjunction with the next one which is as a % of A/R will be useful especially to estimate revenue leakages that are happening and also understanding figures for the cost of doing business in terms of allowances for deductions.
This metric is to evaluate the dollar value of all disputes that are raised as the percentage of total AR.
This metric as a % of total A/R or as a % total sales is a good one to benchmark within the same industry to identify process gaps and failures.
It is the percentage of new applications that your credit analysts process or the percentage of new customers that they have onboarded.
Performance of an credit analyst is evaluated based on the number of applications they process.
Since most cash application processes have some form of automation, the analyst productivity is measured on the number of exceptions they process.
This metric lets you know the rate at which your exceptions are being handled for managing your analysts more efficiently. In addition, it will also allow you to optimize the cash application process to evaluate the most frequently occurring exceptions and remedy the situation.
It measures the average number of invoices received and processed per full-time equivalent (FTE) in the accounts receivable department
Some analysts have multiple job roles across credit, collections, billing. So it is essential to have individual metrics for different processes performed by the analysts. Invoice issued per FTE is a measure of the productivity of an employee in billing the invoices.
It is the number of disputes resolved with respect to the total disputes raised.
Deductions backlog is a big issue especially in the consumer goods industry and looking at the number of deductions resolved per analyst will allow GPOs to compare the efficiency of the analysts
This metric is to keep track of the time required to resolve collection disputes.
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.
This metric is a ratio of A/R invoices with a certain past-due limit to the overall past-due invoices.
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.
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 $8 M and for clients without financials is $6 M while in Dec they were $6 M and $7 M respectively. This shows that the company is taking more risk in January.
Credit managers use different strategies for evaluating credit exposure based on customer profiles. Keeping close tabs on the credit exposure will help GPOs in estimating the bad-debt reserve better and prevent fluctuating bad-debt levels.
This metric measures the efficiency of cash application process within 24 hrs. of payment received.
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.
It expresses the average number of days the invoices get paid after the due date.
If DSO is an overall performance indicator of the accounts receivable department, then ADD is more specific to the collection team and could be used to design collections strategies tailored to customer payment behaviors.
It is the monetary value of invoices received on or before the stipulated payment terms.
A time series of this measure will help you evaluate 1) effectiveness of the collections and the pre-payment discounts strategy and 2) payment behavior of customers. An upward trend is very good news for the working capital of the company.
Invoicing being a labor-intensive work involving data entry, paper-work, revisions, approvals, and bookkeeping, there is a need to drive efficiency by monitoring the time taken by analysts to generate invoices.
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 pay. Reducing the time taken to generate the invoice is critical for collections teams as it enables proactive collections.
Invoice Error Rate measures the percentage of invoices with an error to the total invoices created by the billing and invoicing team.
Invoice errors cause confusion between suppliers and buyers and lowers supplier credibility. The chain of paperwork for communicating the mistake in an invoice sent by you to the customer causes inconvenience at both ends. A large number of non-trade deductions could be attributed to invoice errors and eliminating these could prevent in faster collections.
Total number of credit reviews performed and the time taken per review
This will allow in estimating the volume of work for the credit team for planning periodic credit reviews and blocked order reviews
This metric is a measure of the dollar amount collected on the disputes raised for invalid deductions.
This metric could be used to highlight two things
1) customer behavior and the likelihood of disputing invoices
2) efficiency and effectiveness of the deductions team in researching and finding invalid deductions
This metric is the amount that was collected in a given time period to the amount of receivables that were available for collection in that time period
This metric is a proxy for measuring the effectiveness of the collections department. The closer this number is to 100%, the better it is for the collections team.
It is the ratio of unapplied cash to the total payments received during a certain time period.
This metric helps you in determining the effectiveness of the cash application automation in place and also the analysts for resolving the exceptions.
The table below summarizes the metrics that we discussed in the ebook. By tracking each of these, shared services teams will be able to evaluate process performance, identify actionable next steps for improvement and make strategic impact on the organization.
Digital Transformation Strategies for Order-To-Cash In A…
If you believe that COVID-19 is likely to have a negative impact on…
A Must Have Cheatsheet for O2C Automation:…
Order to Cash automation in shared services has been on the rise in…
4 SME Finance Trends to Watch in…
2019 could be the year of transformation in the finance space. With more…
HighRadius Integrated Receivables Software Platform is the world’s only end-to-end accounts receivable software platform to lower DSO and bad-debt, automate cash posting, speed-up collections, and dispute resolution, and improve team productivity. It leverages RivanaTM Artificial Intelligence for Accounts Receivable to convert receivables faster and more effectively by using machine learning for accurate decision making across both credit and receivable processes and also enables suppliers to digitally connect with buyers via the radiusOneTM network, closing the loop from the supplier accounts receivable process to the buyer accounts payable process. Integrated Receivables have been divided into 6 distinct applications: Credit Software, EIPP Software, Cash Application Software, Deductions Software, Collections Software, and ERP Payment Gateway – covering the entire gamut of credit-to-cash.