Using performance measurement to drive receivables improvement

Guest blog article provided by Christian Terry, CEO, Insight Performance Improvement.

How do you measure cash collection?
What reporting do you have in place to help you improve performance?
When was the last time you tried to measure things differently?

The chances are, you’ll have a month-end or quarter-end DSO figure (Days’ Sales Outstanding, an approximate measure of customer payment term days plus days past due date), and/ or an aged debt report, probably at customer level. From this you’ll track how your DSO is moving over time, hopefully getting smaller, and you get a high-level view of how your aged debt might be tracking.

This can lead to very simple performance targets, such as “let’s keep overdues below 10%”, or “let’s reduce DSO to 45 days”. This is more helpful than nothing, but not by much

There are three primary issues with the use of such limited metrics:

1. As these metrics are generated by a snapshot view of performance on a single day, they will almost never be representative of the daily position through the month. In most cases, typical cash collection performance is more of a hockey stick as collections increase towards month-end. As such, real day-to-day performance is not going to be understood, and in turn neither will the trade receivables funding requirement, and accurate forecasting will also be impossible based on these numbers.
2. Given the high-level nature of these KPIs, they offer very little insight as to the real drivers of performance: the ‘how’, ‘where’ or ‘why’. As such, users are unable to easily identify the underlying drivers of cash improvement and thereby define and take the right steps to improve, in areas such as: invoicing timing and quality, customer payment terms, collections effectiveness, and dispute management.
3. DSO and aged debt are reactive measures; they do not drive forward-looking intelligence, process improvement or workflow optimisation for operational teams. To make real gains in performance improvement from performance measurement, you need to create and collate detailed analyses across the order-to-cash process, and directly link that learning with your forward-looking open ledger at invoice level. By doing this, you will begin to create improved outcomes, optimised process and significantly enhanced performance measurement.

The good news is that the technology is already here for you to break away from tradition, and generate insightful reports that can be automated, link directly into your ERP or source data files, and go into much more detailed analysis and visualisations from data you already collect. Platforms such as Microsoft’s Power BI can give you incredible insights into how customers are behaving and tailor your approach accordingly. Have a look: it could transform the way you do business forever.