To ensure positive cash flow and financial health, organizations must practice proper, regular fiscal monitoring. Those that provide credit to customers should consistently check their management of accounts receivables to minimize the risk of business losses due to delinquent payments.
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Two of the most essential key performance indicators (KPI) in this regard are the following:
Days of sales outstanding (DSO)
Also called average collection period, DSO objectively measures how quickly (or slowly) a company can collect receivables after sales have been completed. It is calculated by dividing average accounts receivable by average daily sales. The ratio that results is then compared with the ideal DSO, which is usually arbitrary and dependent on industry numbers.
Average days delinquent (ADD)
While DSO can be a good metric, especially when used correctly, it is better used with another KPI, namely the ADD. ADD is computed by subtracting the best possible DSO from the DSO. The best possible DSO is calculated by dividing the average current accounts receivable by the average daily sales. To interpret the results, the values of the ADD and DSO are compared alongside one another. If the two ratios are trending in the same direction, it means that the company is either effective (upward) or ineffective (downward) in collecting accounts receivables. If they are moving divergently, improvement or decline in DSO is not due to efficiency in collection of receivables.
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Receivables Performance Management is one of the leading accounts receivable management agency in the nation. Through the years, the company has received glowing reviews from clients in national telecommunications companies, media satellite, credit card, retail card, auto finance, large utilities, and healthcare industries. Follow this Twitter page for more discussions about the industry.
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