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23 Key Order To Cash Metrics Every GPO Must Track To Improve Working Capital

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Global process owners (GPOs) at shared service centers should track key process metrics such as unbilled revenue, cost per invoice, and bad debt write-off to ensure healthy cashflow & working capital.

What's Inside?

  • GPOs who track key order-to-cash performance indicators are more likely to be able to drive their business to success in uncertain times
  • GPOs need to look into strategic metrics such as process cost per invoice, DSO, and unbilled revenue as well as process health metrics such as DDO, cash applied, and credit limits
  • Cloud-based analytics solutions for receivables management help provide GPOs and other business leaders with the required metrics in real-time
CONTENT

Chapter 1

Strategic Metrics

Chapter 2

Individual Performance Metrics

Chapter 3

Process Health Metrics
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Chapter 01

Strategic Metrics


01. Process Cost Per Invoice

STRATEGIC METRIC
Definition:

An indication of the overall process cost of the entire Order to Cash cycle, i.e., from generating customer invoices to delivering them.

WHY MEASURE IT ?

Process Cost per Invoice has a direct impact on the bottom line. Businesses can minimize this cost by:

  • Improving productivity across O2C
  • Collecting on time
  • Reducing deductions through discipline in upstream processes
  • Reducing write-offs and tolerances
  • Keeping track of the overall cost of the process

02. Unbilled Revenue

STRATEGIC METRIC
Definition:

Unbilled receivables, also called “accrued receivables,” are products and services delivered for which invoices have not been generated.
WHY MEASURE IT ?
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 ensures that the invoices are sent on time and that the revenue is realized as quickly as possible.

03. Days Sales Outstanding (DSO)

STRATEGIC METRIC
Definition:

DSO represents the value of receivables outstanding or waiting to be collected from customers, expressed in the equivalent number of days of revenue.
WHY MEASURE IT ?
This metric is an accurate indicator of the current performance of the accounts receivable department.A lower DSO indicates that a company has a stringent credit policy, which may hamper sales performance. A higher DSO is an indication of inefficiency in the analysis of applicants for open accounts.A healthy DSO is no more than 5-10 days longer than weighted average payment terms. Another way to determine if a DSO is healthy is to benchmark against DSO numbers of companies in the same industry.

04. Top-Five Reasons for Deductions/Chargebacks

STRATEGIC METRIC
Definition:

A report that generates the most frequently occurring disputes.
WHY MEASURE IT ?
The dispute team could refer to this report and take corrective action by drilling down into the source of the disputes and preventing them from happening in the future. Some examples include creating sales orders with the wrong pricing details or finding that a particular carrier delivers damaged goods more frequently than others.

05. Bad Debt Write Off %

STRATEGIC METRIC
Definition:

This metric keeps track of the bad debts that are a result of uncollectibles.
WHY MEASURE IT ?
While maintaining a healthy bad-debt reserve is a best practice, keeping closetabs on the bad-debt write-offs figure is vital, as the company needs to sell more orders (depending on the gross margin) to make up for the loss in uncollected revenue.

06. Monetary Value of Dispute Cases

STRATEGIC METRIC
Definition:

The disputed value of the dispute case that the customer has specified.
WHY MEASURE IT ?
This metric is valuable because it gives a number on the value of deductions that an organization is processing. In conjunction with the next metric, which is ‘as a % of A/R,’ this metric will be particularly useful in estimating revenue leakages and understanding the cost of doing business in terms of allowances for deductions.

07. Total Dollar of Disputes as a Percentage of Total A/R

STRATEGIC METRIC
Definition:

This metric evaluates the dollar value of all disputes raised as the percentage of total A/R.
WHY MEASURE IT ?
This metric is helpful for identifying process gaps and failures, which can be benchmarked against companies in the same industry – either as a % of total A/R or as a % of total sales.
Chapter 02

Individual Performance Metrics


08. Credit Applications Processed

INDIVIDUAL PERFORMANCE METRIC
Definition:

The percentage of new applications that your credit analysts have completed processing or the percentage of new customers that they have onboarded.
WHY MEASURE IT ?
This metric is valuable in evaluating the performance of a credit analyst, which is determined based on the number of applications they process.

09. Number of Exceptions Processed

INDIVIDUAL PERFORMANCE METRIC
PROCESS HEALTH METRIC
Definition:

Since most cash application processes have some form of automation involved, an analyst’s productivity can be measured by the number of exceptions they process.

WHY MEASURE IT ?
This metric enables GPOs to manage analysts more efficiently, letting you know the rate at which exceptions are being handled. In addition, this KPI will also allow you to optimize the cash application process by evaluating the most frequently occurring exceptions and remedying the root causes.

10. Invoices Issued per FTE

INDIVIDUAL PERFORMANCE METRIC
Definition:

A measurement of the average number of invoices received and processed per full-time equivalent (FTE) team member in the accounts receivable department.

WHY MEASURE IT ?
Some analysts have multiple job roles across credit, collections, and billing, so it is essential to examine individual metrics for the different processes that analysts perform. Invoices issued per FTE are a helpful measure of the productivity of each employee in billing, enabling GPOs to effectively compare performance across the department.

11. Percentage of Disputes Resolved per FTE

INDIVIDUAL PERFORMANCE METRIC
Definition:

The number of disputes resolved per full-time equivalent (FTE) team member, with respect to the total number of disputes raised across the organization.

WHY MEASURE IT ?
Deductions backlog is a big issue that can impact profits, especially in the consumer goods industry. Looking at the number of deductions resolved per analyst will allow GPOs to compare efficiency among analysts to take action on the deductions backlog.

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Chapter 03

Process Health Metrics


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

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