Analyzing Accounts Receivable Collections

Now that a written collection policy is in place and collection procedures are consistent, gauging the effectiveness of the accounts receivable collection process should be more accurate. Review the results of this data on a regular basis to uncover strengths and weaknesses of the overall collection process.

Following are a few of many methods for measuring an accounts receivable collection department's success.

• Day Sales Outstanding (DSO): DSO is an effective way to measure the number of days on average it takes to collect your receivables. The lower the DSO number, the better. The formula is:
  • (Total Receivables / Total Credit Sales) x Number of Days in Period
• Best Possible Day Sales Outstanding (BPDSO): BPDSO is used to measure the effects of sales terms on the operating cycle of the business. The closer the DSO is to the BPDSO, the more effective the collection process. The formula is:
  • (Current Receivables / Total Credit Sales) x Number of Days
• Average Days Delinquent (ADD): ADD expresses the average days from the invoice due date to the invoice paid date. The formula is:
  • Standard DSO - BPDSO = Average Days Delinquent
• Collection Effectiveness Index (CEI): CEI is a quality of collection measurement. The final number is a percentage. The closer the number is to 100%, the more effective the collection process. The formula is:
  • beginning total receivables + (quarterly credit sales/3) - ending total receivables
    --------------------------------------------------------------------------------------------------------------------------------- x 100
    beginning total receivables + (quarterly credit sales/3) - ending current receivables

The risk management, accounts receivable, and collection processes are talked about more in-depth in the following sections:

• New + Potential Customers
• Current Customers
• Past-Due Customers

We have been using Aguirre Aikman + Brown for collection on accounts for several years. They have been very successful in collecting old and extremely difficult accounts. Additionally, they have been very responsive to requests for collection strategies that will allow us to continue business with customers after collection efforts have concluded. We've had many additional sales from customers referred for collection after accounts have been paid. We highly recommend Aguirre,
Aikman + Brown.

Frances Justice
Finance Collections,
PlanIt Solutions

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