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As a business owner you need to know if your business is healthy. You monitor sales, cash flow and profitability, of course, but what about other financial and operational metrics? Following are some benchmarks for assessing the efficiency and effectiveness of your commercial collection activities.
The most common measure of the efficiency of collections is Days Sales Outstanding (DSO). DSO represents the average number of days it takes to receive payment for an invoice. DSO is calculated as:
DSO = (AR Balance / Credit Sales for a time period) X Number of days in that period
For example, a company with $1.2 million in annual credit sales ($100K/month) and an AR balance of $150,000 would have a DSO of 45.625, as follows:
45.625 = ($150,000 / $1,200,000) * 365
The average DSO for commercial (trade) receivables is around 40 days, although this varies widely by industry. You can get statistics for your particular industry from a trade association or the Credit Research Foundation. Clothing and apparel receivables have a DSO closer to 60 days while groceries and other food products are around 20 days. Much of this variation is due to credit terms. A good rule of thumb is that if your DSO is less that your terms plus 10 days you are doing OK.
Some other measures that are not as sensitive to terms and industry fluctuation include Percent Current and Percent over 91 Days Past Due. These are easily calculated by looking at the summary accounts receivable aging report that should be available from your accounting or ERP software. Performance benchmarks for these are:
• Percent Current – 85%
• Percent over 91 Days Past Due – less than 1%
A second area for benchmarking is the amount of staff effort devoted to collections activity. A recent survey by the Aberdeen Group found that 1 FTE collector could handle on average about 500 invoices per month. Note that this capacity is expressed as number of invoices, not dollars. It takes as much effort to collect a $100 invoice as it does for a $1,000 (or $10,000) one. If you are a small company with 100 invoices per month you should expect to spend about 8 hours per week on collections. If you devote less time your results may suffer. If you and your staff are spending more time on collections you should review your processes to see how you can become more efficient.
John Doucette
Receivables Solution Services
(440) 734-3321
john@lcneo.com
www.lcneo.com