How different credit departments measure success 

When it comes to assessing the performance of a credit department, metrics are key. Whether you’re looking to understand the effectiveness of recent collection efforts or customer payment habits, Key Performance Indicators (KPIs) can be used to analyze different elements of the credit team’s work.

Why it matters: While every credit department relies on metrics to better understand what is going on with their receivables, how they apply and analyze each KPI is shaped by the unique qualities of their credit department and customer base.

“Most metrics in credit revolve around how your receivables are aging,” said Scott Chase, CCE, CICP, global director of credit for Gibson Brands (Nashville, TN). “There are many different KPIs that we consult or that our organization sets goals for, but collections is typically important across the board. Days Sales Outstanding (DSO) may be the most common one, but other metrics might give you a different look. For example, average days delinquent offers a visual of how your organization’s collection activities are doing.”

While DSO is a mainstay in the credit department, there are similar metrics that can gauge the effectiveness of your collection efforts. For Kevin Chandler, CCE, ICCE, Days Receivable Outstanding (DRO) using the layering method offers a better look at accounts receivable performance by taking the total accounts receivables balance and the total amount invoiced by day, then subtracting the daily amount invoiced from the AR balance until the balance is zero. The number of days of invoicing it takes to drive the AR balance to zero is the DRO.

Using the same calculation method with only the current AR balance and the same daily invoicing amount delivers the Best Possible DRO (BPDRO), also known as the average payment term granted to customers at that AR aging date. Subtracting the Best Possible DRO from the DRO delivers the Average Days Delinquent (ADD). 

“DRO, BPDRO and ADD gives you more granularity, more relatable and actionable numbers that are closer to reality than DSO,” said Chandler. “Those numbers reflect what happens across the entire order-to-cash process, so they relate very closely to the credit department. They reflect the overall number of days the AR is outstanding, the number of days of payment terms granted to customers as of the AR aging date, and the number of days the AR is past due. This level of detail is not possible with DSO, creating opportunities to drive improvements.”  

Each credit manager may rely on various metrics depending on their industry, geography and customer base. “I used to work for a company that had a lot of chargebacks and deductions,” Chase said. “So, I looked at metrics measuring the amount in chargebacks against the amount available in collections. Now, I don’t have deductions in my business so it’s not something that I worry about, but I know that, in a prior life, it was important for us to find a way to measure and analyze that information.”

Finding the right metrics for your department also means choosing data points that are easy for those outside of credit and collections to understand. “Try to find metrics that say something that you can analyze and share with your leadership,” Chase said. “You need to know what you’re trying to get out of the numbers. It’s important that you understand comparative analysis, by comparing recent data to the same period 30, 60 or 90 days ago, because metrics are only as good as what you’re comparing them against. It’s all a matter of how you see things and how you want to be able to explain or analyze the information that’s coming out of those metrics.”

Categorizing customers based on the risk they pose and developing metrics around each section of your customer base can help manage risk. “A lot of departments are making evaluations by looking at the individual customer level rather than through risk categories,” Chandler said. “When you group customers by risk (excellent, good, fair and poor, for example), you can easily set risk tolerances by risk category. You can then assess risk as external market conditions shift and potentially introduce more risk. It gives you an opportunity to create some level of prioritization as to where you’re going to spend your time and effort to see where things are going.”  

The bottom line: Like many processes within the credit department, the unique qualities of your company and customer base shape which metrics you consult and how they are applied in your day-to-day work. The best, most reliable metric will always be a wide-ranging combination of data points that best help you understand the complexities of your receivables.