Monitoring AR Performance Through KPIs
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Construction companies should monitor their AR performance through Key Performance Indicators (KPIs). One common tool for monitoring AR is the Aging Report. This report categorizes outstanding invoices based on how long they have been overdue, typically segmented into 30-day intervals (0-30 days, 31-60 days, and over 90 days).
By analyzing the AR aging report, companies can identify which clients are falling behind on payments, prioritize follow-ups, and make informed decisions about extending further credit. This checkpoint helps reduce the risk of credit losses and improve overall cash flow management.
In addition to the aging report, here are some other important KPIs that construction companies track for improved performance:
- Days Sales Outstanding (DSO): Measures the average number of days it takes to collect payment after performance. A lower DSO indicates efficient collections and better cash flow.
- Accounts Receivable Turnover (ART) Ratio: Measures how efficiently a company collects its receivables. It is calculated by dividing net revenue by average accounts receivable. A higher ART ratio indicates that receivables are being collected quickly.
- Collection Effectiveness Index (CEI): Tracks the collections process by comparing the amount collected against the total receivables available for collection. A high CEI shows strong collection practices.
- Average Days Delinquent (ADD): Measures the average number of days payments are overdue. Tracking ADD helps identify trends in late payments and highlights clients that may need closer attention.
- Credit Loss Ratio: Indicates the percentage of receivables that turn into credit loss, providing insights into the quality of AR and the need for improved credit policies.
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In a market defined by fluctuating costs and economic uncertainty, optimizing AR processes can help construction companies improve cash flow, reduce financial risks, and maintain a competitive edge. If you have questions about the information outlined above or need assistance with a tax or accounting issue, JLK Rosenberger can help. For additional information call 949-860-9902 or click here to contact us. We look forward to speaking with you soon.