Feb 25, 2025
Days Sales Outstanding (DSO): Tracks how quickly payments are collected. Lower DSO means faster cash flow.
Collection Effectiveness Index (CEI): Measures how accurately receivables are collected, aiming for 80%-100% efficiency.
Average Days Delinquent (ADD): Focuses on overdue payments and how long they remain unresolved.
Bad Debt to Sales Ratio: Highlights uncollectible debts as a percentage of credit sales, with industry benchmarks ranging from 0.5%-5%.
Accounts Receivable Turnover Ratio: Evaluates how often receivables are collected within a year.
Quick Tip:
AI tools like YayPay, HighRadius, and Tesorio can automate processes, predict payment patterns, and provide real-time insights to optimize these metrics. For example, Jabil reduced DSO from 65 to 48 days, unlocking $120M in cash flow using AI-powered solutions.
By understanding and tracking these metrics, you can improve cash flow, reduce bad debts, and enhance overall financial health.
A/R Metrics - How to Measure and Track Receivables
1. Days Sales Outstanding (DSO)
Days Sales Outstanding (DSO) is a key metric for assessing how efficiently a company collects its accounts receivable. The formula is straightforward:
(Average Accounts Receivable / Net Credit Sales) × Number of Days in Period
Why DSO Matters for Cash Flow
Lowering your DSO can make a big difference in cash flow. For example, reducing it from 60 days to 45 days increases cash availability by 25%, while also reducing the risk of bad debts.
Here’s how DSO typically looks across different industries:
How AI Tools Help Optimize DSO
Modern AR management tools like YayPay, Tesorio, and HighRadius can streamline the process with features such as:
Automated daily DSO reports
Real-time alerts for unusual trends
Predictive insights based on historical data
Additionally, offering early payment discounts (e.g., 2% off for payments made within 10 days) has proven effective in consistently reducing DSO [1][6].
While DSO measures how quickly payments are collected, it works well when paired with the Collection Effectiveness Index (CEI), which focuses on how accurately a company recovers what it’s owed. Together, these metrics provide a more complete picture of AR performance.
2. Collection Effectiveness Index (CEI)
The Collection Effectiveness Index (CEI) measures how well a company collects its receivables during a specific period. It focuses on collection accuracy rather than speed, making it different from Days Sales Outstanding (DSO) [1][3].
Here’s how you calculate CEI:
((Beginning receivables + Monthly credit sales - Ending total receivables) ÷ (Beginning receivables + Monthly credit sales - Ending current receivables)) × 100
This formula uses key variables like starting balances, new credit sales, and ending balances for both total and current receivables.
While DSO highlights how quickly payments are collected, CEI answers a different question: Are you successfully recovering what’s owed? This makes it a valuable tool for assessing overall accounts receivable (AR) performance.
What Counts as a Good CEI Score?
CEI scores above 80% are considered strong, and scores nearing 100% show top-tier collection efficiency [1][4].
How to Improve Your CEI Score
Modern accounts receivable tools can help boost CEI by automating follow-ups, using predictive analytics to identify potential payment issues, and segmenting customers for more focused collection efforts.
Here are two effective ways to improve your CEI:
Standardize payment terms: Make sure invoices are clear and easy to understand.
Track monthly performance: Regularly calculate CEI to identify trends and address issues early [1].
Next, we’ll explore Average Days Delinquent (ADD), which builds on CEI by measuring how long overdue payments remain unresolved.
3. Average Days Delinquent (ADD)
Average Days Delinquent (ADD) measures how long payments remain overdue after their due date. While metrics like DSO and CEI offer a broader view of collections, ADD zeroes in on the specific delays in payment.
How ADD Is Calculated
ADD is determined by subtracting the Best Possible DSO (BPDSO), which reflects payment terms, from your actual DSO. For example, if your DSO is 45 days and your BPDSO is 30 days, your ADD would be 15 days [1][3].
What ADD Performance Tells You
ADD benchmarks vary by industry, but here’s a general guideline [3][7]:
How ADD Impacts Businesses and Ways to Improve It
One manufacturer, leveraging AI-driven accounts receivable (AR) tools, managed to cut its ADD by 30% in just one quarter. They achieved this by streamlining collections and resolving 25% of disputes upfront with automated query handling [3][7].
To reduce ADD, consider these tactics:
Automate payment reminders: Send reminders 7, 3, and 1 day before invoices are due.
Integrate payment portals: Link payment systems directly with your accounting software for smoother transactions.
ADD as a Tool for Strategic Planning
Modern AR platforms often use AI to analyze ADD patterns, which helps segment customers and refine collection strategies. For instance, if your B2B clients consistently have higher ADD than B2C customers, it might be time to rethink credit policies or introduce tailored collection methods [3][7].
4. Bad Debt to Sales Ratio
The Bad Debt to Sales Ratio reveals how much of your credit sales turn into uncollectible debt, highlighting issues in your credit policies. You calculate it by dividing total bad debt expense by total credit sales, then multiplying by 100 to get a percentage. For instance, if your company has $100,000 in bad debt and $5,000,000 in credit sales, the ratio is 2% [1].
Industry Benchmarks
Acceptable ranges for this ratio differ across industries:
Real-World Impact
Jabil is a great example of how this metric can improve. They reduced their ratio from 3% to 0.8% by adopting AI-driven credit scoring and dynamic payment terms. This progress complemented their earlier improvements in DSO, showing how AI-powered AR management can deliver multiple benefits [7].
How to Improve Your Ratio
Here are some actionable steps to manage and reduce your Bad Debt to Sales Ratio:
Monitor the ratio monthly to spot trends.
Categorize customers based on their risk levels.
Use AI tools to automate credit checks [6].
During Economic Downturns
In tougher economic times, step up your monitoring efforts, tighten credit terms, and use AI early-warning systems to stay ahead.
When paired with metrics like DSO and CEI, the Bad Debt to Sales Ratio offers a clearer picture of your accounts receivable health. It’s especially tied to CEI, as poor collection efficiency often results in higher bad debt [1][2][3].
5. Accounts Receivable Turnover Ratio
The Accounts Receivable Turnover Ratio, calculated as Net Credit Sales / Average Accounts Receivable, helps assess how efficiently a business collects payments from its customers [1]. For example, a ratio of 10 indicates that receivables are collected and replaced 10 times in a year.
Industry Benchmarks
The ratio varies widely across industries, as shown in 2022 data [5]:
How to Improve Your Ratio
Boosting your turnover ratio requires practical steps, such as:
Automating invoicing workflows: Streamline the billing process to reduce delays.
Implementing risk-based credit policies: Offer credit selectively based on customer risk profiles.
Using AI tools: Predict collection patterns and optimize processes.
The Role of AI
AI can drive a 15-20% improvement in the turnover ratio annually [8] by:
Analyzing payment patterns automatically
Crafting personalized collection strategies
Forecasting cash flow with greater accuracy
Automating follow-ups with intelligent dunning systems
Linking to Days Sales Outstanding (DSO)
This ratio is closely tied to Days Sales Outstanding (DSO), which measures the average time it takes to collect payments:
DSO = 365 days / AR Turnover Ratio
For instance, raising your turnover ratio from 8 to 10 shortens DSO from 45.6 days to 36.5 days, reflecting faster collections [2]. While the ratio highlights collection frequency, combining it with AI-driven insights (discussed in the next section) can open up new ways to achieve lasting improvements.
Using AI Tools to Track AR Metrics
AI tools have made managing accounts receivable (AR) more efficient and precise. Platforms like YayPay and HighRadius use advanced analytics and automation to reshape how businesses monitor and improve their AR performance.
Manual vs. Automated Tracking
Traditional manual tracking methods rely on spreadsheets and often lead to delayed insights. AI-powered solutions, on the other hand, offer real-time monitoring and advanced analysis. Here's a quick comparison:
Real-World Impact
Siemens offers an example of how AI can transform AR management. In 2022, they adopted HighRadius' AI-powered solution:
"A reduction of DSO from 65 to 52 days within 6 months, leading to a 20% increase in collector productivity and $1.2B in working capital improvement." [3]
Key AI Capabilities
AI tools bring several enhancements to AR metric tracking:
Real-time Transaction Monitoring: Automatically tracks payments and flags irregularities or deviations [1][2].
Predictive Analytics: Uses machine learning to forecast collection trends and detect potential delays [4].
Performance Benchmarking: Compares metrics against industry standards to uncover areas for improvement [7].
Implementation Best Practices
To get the most out of AI tools in AR management, businesses should:
Ensure clean data integration and provide staff training
Start with small, targeted pilot programs and adjust parameters as needed
Prioritize strong security measures to protect sensitive data
Integration Capabilities
AI platforms integrate effortlessly with accounting systems, enabling businesses to:
Monitor metrics in real-time
Develop predictive strategies for collections
These AI-driven approaches allow businesses to precisely manage key metrics like DSO, CEI, and other KPIs, turning insights into actionable strategies.
Wrapping It Up
Combining these five metrics with AI-driven insights can shift AR management from a reactive process to a forward-thinking approach. Metrics like DSO, CEI, ADD, Bad Debt to Sales Ratio, and AR Turnover Ratio work together to give businesses a clear picture of collection performance and overall financial health.
AI-powered tools have reshaped the way companies track and utilize these metrics. Businesses leveraging these tools often see quicker collections, reduced bad debt, and better cash flow tracking. Together, these metrics, supported by AI automation and analytics, deliver actionable results.
With AI’s predictive abilities, these metrics become even more powerful, turning AR management into a key factor for financial stability and growth. By focusing on these five metrics and integrating AI-driven automation, businesses can improve their financial outcomes while maintaining strong customer connections.
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