Benchmarking goals that make sense: How credit teams prioritize KPIs

For many credit departments, the pursuit of stronger practices and better performance is a constant and ongoing effort. As economic and market trends fluctuate, the need for improvement only grows. Through benchmarking—comparing business processes and performance metrics to industry bests and best practices—credit teams are better positioned to achieve refinement. 

Credit teams use key performance indicators (KPIs) to measure how effective a given performance or process is at achieving specific objectives. With a wide range of KPIs available, they can choose which companies or internal areas to benchmark. However, not every metric provides meaningful insight. 

Why it matters: By choosing the right metrics, credit departments can identify areas for improvement, implement best practices and set reasonable goals that align with company objectives. 

While some KPIs remain consistent, like Days Sales Outstanding (DSO) or accounts receivable (AR) turnover rate, the metrics used depend largely on a company’s needs. These needs may shift by segment, industry, economic conditions, company strategy or changes in customer base. “During periods of rapid growth or higher risk, I may focus more on credit quality and delinquency metrics,” said Val Hardesty, CCE, CICP, director of credit and collections at SPATCO Energy Solutions (Charlotte, NC). 

To find the most suitable metrics, consider asking the following questions: What is the primary focus of the company objective? Is the objective getting as much volume or getting as much revenue as possible? Is the data point being measured a KPI? Does the resulting analysis of the data drive action to improve? 

“When benchmarking, I focus on supporting business objectives such as improving cash flow, reducing risk or supporting sales growth,” said Hardesty. “Each KPI I track ties directly to a specific goal. For example, I measure DSO given that a lower DSO helps improve working capital. Other KPIs I pay attention to are delinquency rates, bad debt write-offs and credit approval cycle, which help indicate how efficiently we manage risk, cash flow and customer payment behavior. As I gain more experience, I expect to use benchmarking more actively to refine credit policies, set realistic targets and continuously improve performance while staying competitive within the industry.” 

Once you’ve decided which metrics to use, you need to identify the best-in-class (BIC) as a standard to measure against. Depending on the industry or world region, those standards will vary. If you can’t find sufficient data in your exact sector, you can still draw a meaningful comparison by comparing metrics to companies with the same first two digits of your Standard Industrial Classification (SIC) code.  

“It is helpful to know if we are taking more risk, which is typical when we are trying to grow market share,” said Kelly Simon, CCE, senior credit and collections manager at Outdoor Research (Seattle, WA). “If there is less risk in our portfolio, we may consider if additional adjustments are needed for our current go-to-market approach.”

Practical Advice for Credit Managers
To start, focus on using a small set of meaningful KPIs tied to company goals. Then, learn how each metric is calculated, what drives it and how it aligns with the organization’s risk tolerance and strategy. “New credit professionals should set clear, realistic and measurable goals, like reducing DSO by a few days,” said Hardesty. “Defining what a ‘good’ measurement looks like should be part of your communication with your team and all internal stakeholders, so that expectations are aligned and progress is clearly understood. These goals help drive accountability, focus improvement efforts and ensure everyone is working toward the same performance outcomes.” 

Regularly reviewing metrics can help ensure progress is being made toward your goals. For any significant company change, such as a product launch or discontinuation, entrance into a new market or shift in risk appetite, adjustments to your benchmarking practices may need to be made. “Every January, we re-evaluate our KPIs and reporting for relevancy,” said Simon. “I ask for feedback from the VP of finance and sales management. If prompted, some elements may be added or removed from our reports.”

NACM’s Credit Managers’ Index (CMI) Survey serves as a predictive benchmarking tool for credit professionals. “The survey results keep me informed on shifting trends in the U.S. commercial business cycle and with it, I can gauge my progress over the course of the year or quarter,” said Eric Schlobohm, credit manager at Inspire Medical Systems, Inc. (Golden Valley, MN). “I also use a third party that gathers specific industry data and reviews a company’s financials so that I may examine specific metrics like DSO and AR turnover. I find that joining industry credit groups where you can share that information is helpful.” 

By participating in NACM’s Quarterly Metrics Survey, you can provide valuable data, including AR aging, monthly collection activity, charge-off percentages and credit department staffing. Through these contributions, you’re better able to monitor how others in the industry are performing. 

The bottom line: Benchmarking is critical for continuous improvement. By clearly identifying business objectives and observing industry trends, credit professionals can prioritize the right metrics for their department and build a benchmarking framework that actually drives performance.