How does AR Automation help improve accuracy
May 18, 2023Accounts Receivable Turnover Ratio – its importance and how to calculate
June 4, 2023You can improve what you can measure; this statement very much goes for managing your accounts receivable ( AR ) and AR collection. While managing your accounts receivable, the AR Collection performance is one of the most measurable business functions. The amount of cash collected, the amount of receivables written off, the amount within defined aging categories, and many other receivables dimensions are all finite numbers easily measured by accounting systems.
Top 10 Accounts Receivable KPIs ( key performance indicators ) that will help improve AR collection performance and productivity of your Accounts Receivable team are –
Days Sales Outstanding ( DSO ) :
DSO is one of the best KPI indicators of a company’s ability to convert its receivables to cash. Most companies will review their receivables on a weekly basis, and adding DSO as a measurement can significantly improve the review process. Generally, DSO is determined on a monthly, quarterly or annual basis and can be calculated by dividing the amount of accounts receivable during a given period by the total value of credit sales during the same period and multiplying the result by the number of days in the period measured.
The Formula for Days Sales Outstanding Is
Accounts Receivable turnover ratio ( ARTR ):
This ratio indicates the relationship between revenue from operations and average accounts receivables during the year.
Average accounts receivables are calculated by adding the accounts receivable at the beginning of a period as well as at the end of the period and by dividing the total by two.
While calculating this ratio, the provision for bad debt and doubtful debts is not deducted from total accounts receivable, so it may not give a false impression that accounts receivable are collected quickly.
Average Collection Period :
Accounts Receivable turnover ratio can also be converted into the Average Collection Period – the number of days within which the cash is collected from accounts receivable :
If the Average Collection Period is 32 days means that, on average, accounts receivable take 32 days to get converted into cash. In other words, credit sales are locked up in accounts receivable for 32 days.
An increase in the average collection period indicates the blockage of funds with accounts receivable, which increases the risk of bad debts. A higher average collection period is, thus, an indication of the inefficiency of the accounts receivable management process
Average Days Delinquent ( ADD ):
At times DSO, Average Collection Period or Accounts Receivable Turnover Ratio may not be adequate to measure the AR performance. Average Days Delinquent, also known as delinquent days sales outstanding, complements other key metrics. At any given time, on average, it gives a view of how many days late customers’ payments are.
As one of the critical KPIs, average days delinquent tells AR Specialists how late customers’ payments are on average, at a particular moment in time. This KPI offers a good sense of whether your average late-paying customer is delinquent by just a little or by a lot.
To calculate Average Days Delinquent ( ADD ) one need to know the Days Sales Outstanding (DSO ) and Best Possible Days Sales Outstanding ( BPDSO )
Collection Effectiveness Index (CEI ):
Getting a view on what percentage of Accounts Receivable can be retrieved from the customers is a critical indicator to improve AR Performance. The Collection Effectiveness Index ( CEI ) is a critical KPI to to calculate a company’s ability to retrieve their receivables from their customers. In a given time period, CEI compares the amount of AR that was available for collection to the amount that was collected.
Collection Effectiveness Index formula involves the following parameters –
Beginning receivables – Receivables at the start of the month of a company’s open receivables.
Monthly credit sales – total amount of sales made of credit in that month.
Ending total receivables – all open receivables, including current and overdue receivables.
Ending current receivables – open receivables that are not overdue.
A collection effectiveness index near 85% or above is a good indicator that the collection process is highly effective.
Number of Revised Invoices:
If 12% of your invoices have errors and only 2% of the benchmarked company’s invoices have errors, the receivables results can be very different, even if other factors are equivalent
Invoicing accuracy is one of the most important KPIs that can affect effectiveness and efficiency of accounts receivables management and the AR performance.
Calculating the number of revised invoices is simple. For example, if the company issued 10,000 invoices and 600 non–error-based credit memos during the second quarter of the year, its number of revised invoices would be 6%.
Monitoring number of revised invoices as a KPI month over month or quarter over quarter is one way to measure your accounts receivable ( AR ) performance, and can help you identify areas where you need to improve.
Days Deduction Outstanding ( DDO ):
A deduction occurs when a customer pays an invoice less than the full amount. Customers take deductions when they do not agree with the amount of the invoice or if they believe they are owed money by the supplier. Instead of waiting for the supplier to issue a credit memo, which would be applied to their next remittance, companies take the deduction because it keeps money in their bank now rather than waiting weeks for the credit memo.
Days Deduction Outstanding (DDO) is another important KPI to improve AR performance. This indicator is used to demonstrate how effective a company is at resolving deductions as part of its deduction management process. It refers to the number of days that the account receivables specialist will need to resolve an outstanding deduction. To calculate DDO, the amount of the open deductions is divided by the average value of deductions incurred within a certain period of time.
Cost of collection:
The cost associated with the collection of accounts receivable is a crucial KPI to assess AR performance. The cost of collection looks at the amount of time and money the company is spending to collect payments. This includes the cost of employee time, technology infrastructure, postage, and other expenses related to getting payments from customers.
While many companies measure the resources allocated as part of the Accounts Receivable team, the most crucial factor that gets missed is the time spent by management and supporting members from other business functions.
One of the ways to minimize the inherent cost in collection activities, including management time, is to invest in accounts receivable automation software.
Write-off Ratio:
If we say Collection Efficiency Index ( CEI ) of more than 85% is great, achieving anything closer to 100% CEI will be nirvana. This will mean a risk in the collection portfolio will lead to bad debts and eventually be written off. The write-off ratio becomes one of the critical KPIs to measure Accounts receivable ( AR ) performance and to minimize the impact on the bottom line.
Write-off ratio is the ratio used by a company to measure the written-off receivables in percent compared to the company’s total receivables outstanding. The accounts receivable is written off as bad debt indicating that the company is highly unlikely to receive back the remaining money that was written off.
While there will always be some bad debt that one cannot avoid, it is in the company’s interest to keep the write-off ratio as low as possible.
Bad Debt to Sales Ratio:
Quality of sales revenue and ability to deliver as per customer’s expectation will have direct implications on the bad debts. One of the KPI to measure is the bad debt-to-sales ratio.
Bad debt to sales ratio is a financial metric that compares the amount of money a company loses due to unpaid invoices to its total sales.
The formula for bad debt to sales ratio is
It is calculated by dividing the bad debt expense by the net sales. For example, if a company has $10,000 in bad debt and $100,000 in net sales, its bad debt to sales ratio is 10%. This means that the company loses 10% of its sales revenue to uncollectible accounts.
A high bad debt to sales ratio may indicate that a company has poor credit and collection policies, or that it is facing difficulties in recovering payments from its customers. A low bad debt to sales ratio may indicate that a company has effective credit and collection policies, or that it has a loyal and reliable customer base.
Conclusion :
While the Accounts Receivable KPIs are a great indicator of you’re your teams collection performance, the overriding principle in receivables metrics and reporting is to keep it simple and avoid consuming a great deal of time in their preparation.
The Accounts Receivable KPIs should be used to obtain a general idea of the performance achieved and help you compare with other organizations.
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FAQ
What is an AR collection?
Accounts Receivable (AR) collection is the process through which a business recovers funds owed by customers for products sold or services rendered on credit. In essence, it’s about converting booked revenue into actual cash—a critical function that directly supports a company’s liquidity and long-term financial health.
Every company invests significant resources into generating sales, but revenue alone does not pay salaries, restock inventory, or fund expansion. That revenue must be collected. Each sale made on credit creates an account receivable—essentially a promise to pay. It is the responsibility of the AR collection team to manage that promise until it becomes realized cash.
The accounts receivable collection function is more than just chasing unpaid invoices. It is a strategic and customer-facing component of business operations.
AR collection is both a financial safeguard and a strategic growth lever. Companies that invest in efficient, tech-enabled receivables processes—such as those powered by AI and automation—can dramatically reduce their DSO (Days Sales Outstanding), improve cash flow, and unlock capital for growth.
How to increase AR collection?
Increasing AR (Accounts Receivable) collection is all about transforming how receivables are managed—from chasing payments manually to using data-driven, automated approaches that accelerate cash conversion. For instance, Kapittx focuses on helping finance teams reduce inefficiencies, improve visibility, and recover dues faster through intelligent AR automation.
Here’s how Kapittx helps increase AR collections:
1. Automated Follow-Ups: Manual reminders often fall through the cracks. Kapittx automates timely and personalized follow-ups based on invoice due dates and customer behavior, ensuring no payment is left behind.
2. Real-Time Visibility: With smart dashboards and aging reports, finance teams gain full visibility into outstanding receivables, customer-wise payment trends, and pending actions—all in one place. This makes prioritizing high-risk accounts and overdue invoices faster and more actionable.
3. Smart Payment Matching: Kapittx streamlines the cash application process by automatically matching incoming payments with open invoices—even in complex scenarios like partial payments or multi-invoice remittances—reducing unapplied cash and reconciliation delays.
4. Proactive Risk Management: The platform flags potential defaulters early with predictive analytics, helping businesses focus collection efforts where they matter most and reduce bad debt exposure.
5. Collaboration Across Teams: With shared access to customer communications, payment history, and dispute resolution workflows, finance teams and sales/service teams work in sync to improve collection outcomes while maintaining customer satisfaction.
By making the AR process faster, more transparent, and less manual, Kapittx empowers businesses to unlock trapped cash and scale collections without scaling headcount.
What is the difference between accounts receivable & collections?
While closely related, accounts receivable and collections refer to distinct functions within the financial operations of a business, and understanding the difference is key to managing cash flow effectively.
Accounts receivable (AR) refers to the total amount of money owed to a business by its customers for goods or services delivered on credit. It’s essentially a record of outstanding invoices—a current asset on the balance sheet. The AR function is responsible for generating invoices, recording payments, applying cash, tracking aging, and maintaining accurate customer accounts. It’s a critical financial process that ensures revenue is recorded and monitored until it’s converted into actual cash.
On the other hand, collections is the subset of activities within the AR process focused specifically on recovering overdue payments. This involves reaching out to customers whose payments are past due, resolving disputes, negotiating payment plans, and escalating accounts that may require further action. While AR looks at the full lifecycle of credit sales, collections zeroes in on the recovery of outstanding amounts and minimizing bad debt.
At Kapittx, we bring both of these together into one intelligent, automated platform. Our solution allows businesses to:
- Manage the entire AR workflow, from invoice generation to reconciliation
- Automate follow-ups and collections communication based on customer behavior and aging
- Provide real-time visibility into receivables performance and high-risk accounts
- Reduce manual effort and DSO through AI-driven payment matching and predictive insights
By automating both AR and collections, Kapittx helps finance teams work smarter, not harder—ensuring that every dollar earned gets collected faster and with fewer errors.
What are the key accounts receivable collection strategies?
Effective accounts receivable (AR) collection strategies revolve around timely action, customer-centric engagement, and real-time visibility—principles that are central to how Kapittx helps businesses manage collections.
Here are the key AR collection strategies informed by Kapittx’s platform and approach:
- Automated Follow-Ups Consistent and timely follow-ups are crucial for accelerating collections. Kapittx uses intelligent automation to send reminders based on invoice due dates, aging buckets, and customer payment behavior—ensuring no receivable falls through the cracks.
- Centralized Communication & Tracking Rather than scattered email threads and spreadsheet tracking, Kapittx brings all collection-related communication into a single platform. This allows finance teams to maintain visibility on what’s been said, what’s due, and what actions are pending.
- Prioritization of High-Risk Accounts – Kapittx uses data-driven insights to flag overdue invoices, customers with erratic payment patterns, or accounts showing early signs of default. Prioritizing these cases enables teams to take proactive steps and reduce bad debts.
- Customized Collection Workflows – Different customers require different collection styles. Kapittx enables teams to segment customers and apply tailored follow-up sequences, escalating communications appropriately while preserving client relationships.
- Real-Time Dashboards & Aging Reports – Knowing where your receivables stand at any moment is essential. Kapittx provides live dashboards and aging views so AR teams can stay focused and respond faster.
- Seamless Collaboration – Collections aren’t a siloed activity. Kapittx enables collaboration between finance, sales, and customer service to ensure smoother dispute resolution and coordinated recovery efforts.
By deploying these strategies through automation and intelligence, companies can significantly reduce Days Sales Outstanding (DSO), improve recovery rates, and enhance customer satisfaction, without increasing headcount.
What percentage of accounts receivable should be over 90 days?
The percentage of accounts receivable (AR) that is over 90 days old is a critical indicator of how well a company is managing its collections and overall cash flow. While benchmarks can vary by industry, a healthy AR portfolio typically keeps less than 20% of receivables in the 90+ day aging bucket. In fact, many high-performing organizations aim for under 10%
Kapittx businesses actively reduce their 90+ day receivables through intelligent automation and real-time visibility. Our platform enables finance teams to:
- Track aging buckets dynamically, so overdue invoices are flagged and prioritized before they become problematic.
- Automate follow-ups and reminders, ensuring that no invoice is forgotten or delayed due to manual oversight.
- Identify high-risk accounts early using predictive analytics, allowing teams to intervene before invoices age beyond 90 days.
- Streamline dispute resolution and payment matching, which are common causes of delayed collections.
Every dollar sitting in the 90+ day bucket is cash trapped in the system – cash that could be reinvested into operations, growth, or innovation. By reducing this percentage, companies not only improve liquidity but also reduce the risk of bad debt and write-offs.
If your AR aging report shows a growing share of receivables over 90 days, it’s a signal to revisit your collection strategy. Kapittx can help you bring that number down consistently and predictably.
