Measuring Collection Performance
There are numerous collection measures for evaluating performance. There are measures to assess performance at the organizational level and others that get more granular in appraising the performance at the collections business unit level or evaluating performance of an individual collector.
Aged Trial Balance or ATB is the basic accounts receivable schedule that most organizations generate and monitor. The report puts customer sales invoices into several different age buckets which are based on the number of days the invoice is aged from its due date. As an example if a customer invoice remains unpaid 23 days after its due date it would be placed in the 0-30 days age bucket or if an invoice remained unpaid 77 days after it became due then it would be placed in the 61-90 days age-bucket/column.
Each aging bucket can be transposed into a percentage of total receivables.
For example: Percentage of Age Category 61-90 = [(Sum of 61-90 days receivables)/Total Receivables] x 100
Or a Percent of all receivables Over 61 Days can be calculated as [(Sum of 61-90 days receivables + all other older than 90 days receivables)/Total Receivables] x 100
The ATB thus becomes a handy management tool to monitor performance of outstanding receivables from customer. The report can be generated for customers of a specific collector or a particular sales territory to identify problems or opportunities. ATB can also form the basis determining allowance for bad debt write offs.
Bad debts that get written-off can be expressed as a percentage of total credit sales.
It is calculated as [Bad Debt Write Offs/ Credit Sales] x 100
A lower percentage would signify meaningful credit collection policies being administered.
Monitoring the receivable management process has several benefits:
- It identifies areas of strengths and weaknesses
- It can help optimize individual performances
- Impact cash flow and bad debt write offs
- Identify and resolve customer issues early thus improving customer perception and relations
- Identify potential risk areas
- Bridge the training gap if any and keep employee retention and morale high
- Constantly address credit & collection policies & procedures thus making the process dynamic.
- Increase overall productivity, reduce costs and improve the organization’s bottom line.
The followig three collection metrics are further discussed that can help monitor and manage collection efforts: