Your firm is probably already measuring Days Sales Outstanding (DSO) to measure your A/R performance. But DSO is not the most accurate way to determine if you’re collecting effectively. Days Sales Outstanding can be misleading, as it has a key weakness — it fluctuates with revenue. So changes in sales inversely affect the DSO.
Financial experts recommend two other top A/R metrics:
Weighted Average Days Late (WADL)
WADL expresses the average days from the invoice due date to the invoice paid date, or the average number of days that invoices are past due, weighted by the payment amount. WADL is based on the invoice due date rather than the invoice initiated date.
Collection Effectiveness Index (CEI)
CEI essentially measures how well your collections staff is collecting funds from clients. It compares the amount that was collected in a given time period to the amount of receivables that were available for collection. The closer you are to 100%, the more effective you are at collections.
Of special importance also is the trend of these A/R metrics. If they’re getting longer, then clients are taking longer to pay their invoices. This could be a signal that clients are dissatisfied, that they’re less credit-worthy, or that your sales people are offering longer payment terms.
If your firm uses Deltek Vision for accounting, we make it easy to track CEI, DSO and other A/R metrics with our add-on financial product for Deltek Vision, EleVia A/R Management & Collections. You can read how leading architecture firm CallisonRTKL used EleVia A/R Management & Collections to significantly reduce aged receivables in their Client Success Story.