I2CREDIT Nº 33
Performance Measures for Credit, Collections and Accounts Receivable
If there is one thing that credit executives agree upon, it is that they cannot agree on which measures to use in evaluating individual, departmental, and company performance. In researching the myriad measures available, it is evident that choosing an individual or group of measures is a personal, company, or industry preference. Since many organizations cannot agree among themselves on which measures to use, the person with the most authority usually dictates the measures to be reported to management. Even though credit, collections, and accounts receivable personnel report the requested data to management, most individually track other measures to "see how they are really doing."
Por: Fuente: http://www.crfonline.org
Dynamic credit executives plan and direct the credit, collection, and accounts receivable functions to increase sales and profits. While pursuing these goals, they use their decision-making capabilities to foster growth, optimize cash inflows, and improve the quality of work performed by credit, collections, and accounts receivable personnel. Using valid measures of performance is critical in this process. For many years credit and finance professionals, along with academic researchers, have been seeking a means of accurately measuring performance in credit, collections, and accounts receivable. Most of the measures that are currently in use have value. Unfortunately, they also have flaws. The challenge is to understand the individual measures and use them appropriately. The prudent credit professional will have a clear understanding of the importance of spending the necessary time and effort to understand the individual measures of performance and implement the appropriate measures to meet the needs of their organization.
Using Appropriate Measures of Performance Can Help:
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Identify areas of expertise |
Identify areas of potential growth |
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Improve policies and procedures |
Reduce errors or defects |
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Shorten lead time |
Increase customer satisfaction |
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Reduce customer complaints |
Increase customer retention |
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Improve financial performance |
Improve employee morale |
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Focus employee training and support |
Increase productivity |
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Increase cash flow |
Reduce costs |
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Reduce bad debt |
Perform fair individual and group evaluations |
Regardless of the measures chosen to evaluate an organization, they must be able to stand the test of time. The measures that make an organization look good today may not in the future. The goal is to identify and consistently use valid measures that work over time, not just measures that work for the moment.
If a measure is not understood it should not be used. It is difficult to explain or defend something that is not understood. Always use measures that accurately reflect reality, and then manage for improvement.
What Makes A Measure Meaningful?
A meaningful measure fills a need and meets a specific objective. If a measure does not accomplish a purpose, don't use it. If a measure is being used and the objective is not understood, figure it out. All productive activity has a purpose. Meaningful measures will support the organization's mission and help reach organizational goals.
The measure used must have a standard. The standard can be a set value or a range. For example, if the controller of a company is using Days Sales Outstanding (DSO) as an overall measure of accounts receivable in relationship to credit sales, what is acceptable? Is the standard a set value such as 45 days, where any value below 45 days is acceptable? Perhaps the standard is a range such as 42 days to 51 days, where any value within the range is acceptable. Using a range as a standard has some benefits. In this example, the low-end of the range may reflect a credit policy that is too strict, while the high end may indicate a policy that is too liberal. If a company does not sell to marginal customers, the company's DSO will be lower than if they accept the increased risk and potential profit associated with marginal customers.
A measure must be compared to some standard or it has no meaning. Standards may be set according to past organizational or industry values or trends. Again, using the DSO example, the acceptable range may be the industry high and low from a standard determined externally, such as those published by the Credit Research Foundation in its quarterly publication, The National Summary of Domestic Trade Receivables or Robert Morris Associates' Annual Statement Studies. Choosing a range for a standard can provide the tolerance that is sometimes needed to allow for situations such as seasonal sales.
Consistency is the next element of a meaningful measure. If the standard DSO calculation is used one month, Sales Weighted DSO cannot be used the following month. Likewise, the acceptable standard and the comparable standard cannot change monthly. It's true that measures need to be evaluated and updated from time to time, but the update should be completed on more of an annual basis than monthly.
The effective implementation of measures requires action. This is similar to a guidance system on a missile. It has an acceptable standard (hitting the target). It also has a comparative standard (the course to the target). The missile is constantly comparing its current position (course) to its destination (target) and making the necessary corrections to stay on course. As mentioned earlier, the acceptable standard can be specific or general.
An effective measure provides a benefit. One benefit could be the satisfaction of reaching a goal and realizing the implications of that success. The question could be asked, "If a measure provides no benefit, why bother using it?"
Organizations should communicate all measures and standards to those individuals who are responsible for executing the action plan that will help the organization reach its goals. Measures of performance should be graphed or charted as part of the reporting process. The old adage that states, "when performance is measured, performance improves, but when performance is measured and reported, the rate of performance accelerates" is true.
What Is The "Right" Measure?
The right measure is the one that meets your organizational needs. To determine if a measure meets your organizational needs, logic dictates that you must first understand those needs. Once your needs are understood, you must then identify the most appropriate measure to meet them. This requires a thorough understanding of what the measure expresses. The right measure will express a value that complements and supports the objectives of the company, division, department, or subgroup.
The following questions will help you determine if the right measure is being used:
• What does the measure express?
• What do the results of the measure indicate?
• Does the measure support the objectives?
• Is the measure valid?
• Is there a more valid measure that should be used?
• Does the use of the measure's results comply with organizational goals and values?
• Should the measure be used independently or in conjunction with other measures?
TIP
When calculating formulas that require the number of employees and an employee performs tasks in addition to the measure being calculated, you must allocate the employee as a percentage of the time spent working on the measure being calculated or the ratio will be inaccurate. Always allocate employees in terms of full-time equivalents.
Formulas such as DSO that use periods of time, can be very erratic over the course of a year if the business is affected by seasonal sales influences or long dating terms. A suggestion would be to change the formula to use a year's worth of data. For instance use a rolling 12 months so that the impact of the sales peaks and valleys is somewhat neutralized.
Credit and Collection Measures
Collection Effectiveness Index (CEI)
Definition: This percentage expresses the effectiveness of collection efforts over time. The closer to 100 percent, the more effective the collection effort. It is a measure of the quality of collection of receivables, not of time.
Formula:
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Beginning Receivables + (Credit Sales/N*) - Ending Total Receivables |
X 100 | ||
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*N = Number of Months or Days
Days Sales Outstanding (DSO)
Definition: This figure expresses the (aggregate) average time, in days, that receivables are outstanding. It helps determine if a change in receivables is due to a change in sales, or to another factor such as a change in selling terms. An analyst might compare the days' sales outstanding with the company's credit terms as an indication of how efficiently the company manages its receivables.
Formula: Ending Total Receivables x Number of Days in Period Analyzed
Based on Customers Payment Patterns Definition: This figure expresses the best possible level of receivables. TIP: This measure should be used together with DSO. The closer the overall DSO is to the Average Terms Based on Customer Payment Patterns (Best Possible DSO), the closer the receivables are to the optimal level. Formula: Current Receivables x Number of Days in Period Analyzed Sales Weighted DSO
Formula:
True DSO Definition: The accurate and actual number of days credit sales are unpaid. Formula: Number of days from invoice date to reporting date x (invoice amount/net credit sales for the month in which the sale occurred) = True DSO per invoice. The sum of True DSO for all open invoices = True DSO per total accounts receivable. Delinquent DSO or Average Days Delinquent
Formula: DSO minus Average Terms Based on Customer Payment Patterns (Best Possible DSO) Days Average Collection Rate Definition: This figure expresses, in days, the average time from the invoice date to the date paid. Formula: Total Flow of Funds
Formula:
Percent Over 61 Days -- or Percent of Any Age Category Definition: This figure expresses the percentage of Total Receivables that is 61 Days or more past due. Formula: Sum of the 61 Days and Older Categories
Formula: Bad Debt Net of Recoveries
Definition: This figure represents the total number of active accounts per department employee. Generally, the higher the number of accounts per employee, the more efficient the use of technology and people. (This is a departmental measure.) Formula: Number of Active Customer Accounts
Formula: Number of Active Customer Accounts
TIP: Operating Cost per Employee is listed here in the Credit and Collections section, but is just as valuable and applicable under Accounts Receivable. The formula is the same for each department. Formula: Departmental Operating Costs
Formula: Departmental Operating Costs Is your cost per credit sales dollar good? This question is relative. It could be answered by benchmarking with other organizations or measuring itself against its own past performance. Cost of Collections Definition: This percentage represents the cost of collecting the collectable amount of Bad Debt. The lower the percentage, the more effective the attorney(s) or agency(s) employed.
Amount Paid to Attornies and Agencies
You must set the criteria for your business. Example: by identifying accounts that have at least $2,000 over 60 Days and a total due of $5,000 or more that are not paying according to terms because of improper billing or processing problems. The closer to zero the more effective the collection effort, the better the working relationship with the customer and the more credit, collections, and accounts receivable policies and procedures are being followed. Formula: The Number of High-Funds Generating Accounts
Formula: Number of High-Risk Accounts
Formula: Number of Checks Processed
This measure could include automated remittance processing "auto-cash". (Whether automated processing is included or not is a matter of choice, or in benchmarking comparability, sense consistency is the key.) Once the parameters are set, they should not change in like comparisons. Formula: Number of Transactions Processed
This measure could include automated remittance processing "auto-cash". (Whether automated processing is included or not is a matter of choice, or in benchmarking comparability, sense consistency is the key.) Once the parameters are set, they should not change in like comparisons. Formula: Number of Transactions Processed
Formula: Deductions Processed
Formula: Departmental Operating Costs
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Ultimas Notas
I2CREDIT Nº 33
La persuasión en la empresa
Persuadimos cuando conseguimos que alguien crea, quiera o haga algo que nosotros deseamos. Pero no hay que confundir persuasión con obediencia, ya que las personas llegan a persuadirse cuando por sus propios pensamientos y sentimientos llegan a aceptar propuestas, sugerencias o razonamientos ajenos. Estar persuadido es querer efectivamente lo que otro quiere.
La psicofisiologÃa afirma que la adhesión siempre se forma en el cerebro, pero cuidado, no necesariamente a partir de conceptos estructurados lógicamente, sino que es a través de evocar imágenes seductoras que producen el consentimiento y que pueden ser reforzadas por medio del lenguaje. En consecuencia sólo en el caso de los individuos en los cuales la lógica es fuente de placer, puede esta ser instrumento de persuasión.
Por: Jorge Fernández Locutor, Profesor Universitario y Especialista en Oratoria y Comunicación Profesional
Cobranzas se escribe con P
Para Persuadir a un deudor para que nos Pague no hay ninguna duda que no debo ser una Persona Pasiva.Debo ejercer Presión de diferentes maneras, con mi Presencia Permanente, con mi Persistencia Para Provocar la decisión del deudor.
Por: Dr. Eduardo Buero Especialista y Disertante Internacional de Cobranzas
España: Insolvencias familiares
Hace algunas semanas el Juzgado de lo mercantil nº 3 de Barcelona declaró en situación de concurso a un matrimonio de Sant Salvador de Guardiola (Cataluña). Esta decisión judicial equivale a declarar en quebranto patrimonial a la familia, al no poder ésta hacer frente al pago de sus deudas debido a una enfermedad grave que el marido habÃa contraÃdo y que le obligó a dejar de trabajar.
Por: Pere J. Brachfield Morosólogo, Presidente de la Asociación de Gerentes de Crédito de Cataluña y Profesor de EAE
Costa Rica: El manejo de riesgos en Costa Rica
En el mercado nacional, la gestión de riesgos en las diferentes clases de instituciones, sin duda, fue y está siendo motorizada por la normativa emanada de sus respectivos organismos de supervisión, más que por una convicción propia de la necesidad de este tipo de acciones.
Por: Dr. Jorge Ambram Presidente ejecutivo, Grupo J.A. Capital Markets SCC.
Notas Destacadas
- 2012
- CREDIT PERFORMANCE Nº 106
- CREDIT PERFORMANCE Nº 105
- CREDIT PERFORMANCE Nº 104
- CREDIT PERFORMANCE Nº 103
- CREDIT PERFORMANCE Nº 102
- 2011
- CREDIT PERFORMANCE Nº 101
- CREDIT PERFORMANCE Nº 100
- CREDIT PERFORMANCE Nº 99
- CREDIT PERFORMANCE Nº 98
- CREDIT PERFORMANCE Nº 97
- CREDIT PERFORMANCE Nº 96
- CREDIT PERFORMANCE Nº 95
- CREDIT PERFORMANCE Nº 94
- CREDIT PERFORMANCE Nº 93
- CREDIT PERFORMANCE Nº 92
- CREDIT PERFORMANCE Nº 91
- 2010
- CREDIT PERFORMANCE Nº 90
- CREDIT PERFORMANCE Nº 89
- CREDIT PERFORMANCE Nº 88
- CREDIT PERFORMANCE Nº 87
- CREDIT PERFORMANCE Nº 86
- CREDIT PERFORMANCE Nº 85
- CREDIT PERFORMANCE Nº 84
- CREDIT PERFORMANCE Nº 83
- CREDIT PERFORMANCE Nº 82
- CREDIT PERFORMANCE Nº 81
- CREDIT PERFORMANCE Nº 80
- 2009
- CREDIT PERFORMANCE Nº 79
- CREDIT PERFORMANCE Nº 78
- CREDIT PERFORMANCE Nº 77
- CREDIT PERFORMANCE Nº 76
- CREDIT PERFORMANCE Nº 75
- CREDIT PERFORMANCE Nº 74
- CREDIT PERFORMANCE Nº 73
- CREDIT PERFORMANCE Nº 72
- CREDIT PERFORMANCE Nº 71
- CREDIT PERFORMANCE Nº 70
- CREDIT PERFORMANCE Nº 69
- CREDIT PERFORMANCE Nº 68
- 2008
- CREDIT PERFORMANCE Nº 67
- CREDIT PERFORMANCE Nº 66
- CREDIT PERFORMANCE Nº 65
- CREDIT PERFORMANCE Nº 64
- CREDIT PERFORMANCE Nº 63
- CREDIT PERFORMANCE Nº 62
- CREDIT PERFORMANCE Nº 61
- CREDIT PERFORMANCE Nº 60
- 2007
- CREDIT PERFORMANCE Nº 59
- CREDIT PERFORMANCE Nº 58
- CREDIT PERFORMANCE Nº 57
- CREDIT PERFORMANCE Nº 56
- CREDIT PERFORMANCE Nº 55
- CREDIT PERFORMANCE Nº 54
- CREDIT PERFORMANCE Nº 53
- 2006
- CREDIT PERFORMANCE Nº 52
- CREDIT PERFORMANCE Nº 51
- CREDIT PERFORMANCE Nº 50
- CREDIT PERFORMANCE Nº 49
- CREDIT PERFORMANCE Nº 48
- CREDIT PERFORMANCE Nº 47
- CREDIT PERFORMANCE Nº 46
- CREDIT PERFORMANCE Nº 45
- CREDIT PERFORMANCE Nº 44
- CREDIT PERFORMANCE Nº 43
- CREDIT PERFORMANCE Nº 42
- CREDIT PERFORMANCE Nº 41
- 2005
- CREDIT PERFORMANCE Nº 40
- CREDIT PERFORMANCE Nº 39
- CREDIT PERFORMANCE Nº 38
- CREDIT PERFORMANCE Nº 37
- CREDIT PERFORMANCE Nº 36
- CREDIT PERFORMANCE Nº 35
- CREDIT PERFORMANCE Nº 34
- CREDIT PERFORMANCE Nº 33
- CREDIT PERFORMANCE Nº 32
- CREDIT PERFORMANCE Nº 31
- CREDIT PERFORMANCE Nº 30
- CREDIT PERFORMANCE Nº 29
- 2004
- CREDIT PERFORMANCE Nº 28
- CREDIT PERFORMANCE Nº 27
- CREDIT PERFORMANCE Nº 26
- CREDIT PERFORMANCE Nº 25
- CREDIT PERFORMANCE Nº 24
- CREDIT PERFORMANCE Nº 23
- CREDIT PERFORMANCE Nº 22
- CREDIT PERFORMANCE Nº 21
- CREDIT PERFORMANCE Nº 20
- CREDIT PERFORMANCE Nº 19
- CREDIT PERFORMANCE Nº 18
- CREDIT PERFORMANCE Nº 17
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