Evaluating Credit Performance Using Metrics

7 Aug

Gauging your credit team’s performance is a good way to make improvements to your overall credit process. Many companies struggle in identifying useful metrics to assess their overall performance. When relevant metrics are utilized, the collection process bottlenecks can be identified and oftentimes be eliminated. Here are some key performance metrics that many companies have found useful in improving the success of their credit teams.

Days Sales Outstanding (DSO) 

Days Sales Outstanding is a popular metric in evaluating credit performance. DSO is a common calculation used by a company to estimate the magnitude of their accounts receivable. Rather than being computed in a dollar amount, it is measured in average sales days. A high DSO can indicate a company’s customer base having delinquent payment issues while a very low DSO can indicate that your company may have a credit policy that is too rigorous, reducing the number of overall sales. 

Percent Past Due

Percent past due is a metric used to show what percentage of accounts receivable are late with their payment. A high percent past due may indicate a need to restructure your credit process. Additionally, a remarkably low percent past due can once again indicate your credit process is too rigorous and you are losing sales as a result.  

Bad Debt as a Percentage of Sales

Bad debt is something that all companies fear, and rightfully so. Being able to track what percentage of your sales have resulted in bad debt is a good way to determine if changes need to be made to your credit process. Although bad debt is inevitable, it is crucial to minimize this as much as possible. Sometimes a simple tweak to your process can pay huge dividends. 

A/R Aging Summary

Make sure to keep track of your accounts receivable on a monthly/quarterly/annually basis. An upward trend in these metrics in the short term may indicate a problem but it can also be skewed by large accounts. Looking at these metrics on a quarterly or annual basis is important to see the full picture. 

These performance metrics help your company identify if changes need to be made to your credit process. Additionally, they are useful in incentivizing your team to reach higher levels of success. Although these are not all of the possible ways to measure your credit team’s performance, they are easy and effective in helping you understand when an issue may be present.

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