KPI's Part 3

Now we all know what KPI's are ( if not see Part 1 & Part 2 ), let us actually use one. A good place to start is to see how we are performing on credit control. 

If on average an SME takes 60 days to pay it's bills and a large company 80 days ( see Getting paid ), then are we getting paid quicker or slower than average?

The way to find out is by using the average collection period KPI as follows:

Average Collection Days =

Average trade debtors (exc VAT sales tax) x 365, divided by annual sales

For example, if our average trade debtors (exc VAT) are 100,000 and our annual sales 1,000,000 then our average collection period is 36.5 days.  A good result and one most SME's would be more than satisfied with. 

It could be that our debtors were 200,000 instead of 100,000 then our average collection period would be 73 days.  In this case we could look at improving credit control to get paid quicker and help with cashflow.

By monitoring the KPI we can spot potential trends in advance.  For example, when the average collection days lengthen it could be the result of economic factors, such as a recession.  It could be that a particular industry sector is hardening with the result cashflow and margins are tighter for all companies involved. 

Monitoring average collection is also a great way of monitor credit control performance; if you stop chasing the debts for a month then you can expect the average collection days to increase.  For start-ups it is all about cashflow and not paper profits and average collection days helps put credit control into focus rather than it being a blur.

Background information & detail

Annual sales

Ideally, this should be credit sales only e.g strip out any cash sales. The sales figure needs to be annual so ensure that you take a 12 month peiod.

Average trade debtors

It is usually adequate and easier to take the period end figure.  However, if there are very large seasonal variations in the year it is better to take an average figure. The true average is the average of 12 monthly debtors figures. 

To compare directly with published credit control statistics ( see Getting paid ), VAT sales tax needs to be excluded from trade debtors figure.  However, to monitor changing performance for the business it's adequate and easier to use trade debtors including VAT sales tax.

Philip Woodgate

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Comments

[Philip Woodgate]

I have been exchanging emails with Nick Winton at http://www.londonweb.net/ on KPI's. Nick's use of KPI's is first rate and his overall approach is a significant benefit to the company.

Nick made the following very important comment on the Average Collection Days KPI:

"It might be worth amplifying to the owner/MD of a SME that other benefits of monitoring Ave Collection Days is that it gives an early warning that the business is failing to deliver what the customers want (the effect is rising levels of invoice queries and disputes but often the first one sees is lengthening payment periods)."

Quite right.

[Claire Freer]

Hi Philip, I own an Outsourced Credit Control company and have found that if an invoice is passed to a third party, it will be collected within 7 days, 85% of the time. Obviously this changes by industry and size of company but it definately works for us.

Credit control isn't a core area of business, however, it is imperative to a business to have someone to manage the invoices on a daily basis. It's persistance and politeness that works for us and not storming in like a bull in a china shop.If clients are contacted before the invoice is due, any queries or disputes should be resolved before the invoice due date. This can save valuable time and possibly get the invoice paid on time!