accounts receivables

5 order-to-cash performances metrics to look at

Establishing order-to-cash performances metrics is a very beneficial step in optimizing your accounts receivable. For example, you can monitor the percentage of late payments, the average payment time, the rate of collection and your irrecoverable debts in order to get a better picture of your performance and what to improve. By doing so, you’ll be able to make decisions that are more in line with your company’s reality.

If the payment period you give your customers is too long relative to your own debts, for instance, a small change in the payment terms could benefit your cash flow.

There are a number ways to measure the efficiency of your processes. We have identified five key indicators for accounts receivable that can clarify how to optimize your sales cycle.

5 helpful order-to-cash performances metrics to monitor your accounts receivable

Measure human productivity

This means comparing the total number of orders to the number of full-time employees (FTEs). It allows you to measure individual productivity. The goal is not to monitor your employees, but rather to identify inefficient processes and to improve them. It’s also a good way to find out whether you need more workers and whether your processes need adjustment. Besides lowering the cost of your processes, it’ll give you a better idea of how much more work your company can handle with the number of employees on hand.

Calculate the average payment period

Some invoices will get paid late, obviously. Being aware of how many will come in late not only allows you to establish a collection process, but also to determine the number of invoices that will turn into bad debt. Based on this information, the accounts receivable department can adjust its order to cash cycle according to the number of late payments and unpaid invoices in order to minimize their frequency. To address the problem, you could develop a reward policy for prompt payment or, conversely, establish some monetary penalties for payments that are significantly late.

Assess the level of automation

Assessing your process automation is a means of ensuring that everything is working optimally. To do so, you can focus on several things that you’ve already automated and check, for example, the manual processes that are still in place. You can look at whether the error rate has improved, billing is more efficient, and payments are being made quicker. Automation can also be used to clean up your databases, which you need to ensure are accurate. So you will be able to check that your processes are going smoothly and process a greater number of orders more efficiently, thus getting get paid faster.

Measure the percentage of income

This is a fairly common indicator, but is one that shouldn’t be overlooked. For this indicator, you measure the value of the sales cycle in terms of the percentage of your company’s total revenue. It’s a way to find out if the income generated by your existing processes constitutes a large enough proportion of your income. Ideally, this income comes from the sale of products rather than other sources.

Compare receivables to sales

Monitoring the level of receivables provides a significant indicator of whether your cash flow and sales cycle are in good shape. If your receivables start to exceed revenues, you risk not getting paid and could lack the funds to keep things running smoothly.

Producing invoices also costs money: according to the Institute of Financial Operations, 40% of hard-copy invoices cost $25 each to produce. That’s why you need to have a handle on how many invoices are issued and how many are paid on time. If not, it’s time to think about optimizing the processes for preparing and sending invoices, e.g. sending them by email or grouping orders together.

Each of these performance indicators provides a good opportunity to determine whether you’ll need to consider optimizing an accounts receivable process. But it’s best to take it one step at a time! That’s why Objectif Lune is here to support you every step of the way. Check out our website to find out more.