Telling an Accurate Credit Story with Metrics

Key performance indicators (KPIs) are a set of quantifiable measurements used to gauge a company’s overall long-term performance. KPIs help determine a company’s strategic, financial and operational achievements, especially compared to those of other businesses within the same sector. With the various forms of KPIs available, companies can improve their performance and meet long-term goals. A wide range of formulas exist to measure the ever-expanding list of tasks that fall under the responsibility of credit departments

The formulas used to measure efficiency have not changed, but the strategy to drive improvement using metric findings is different today and will continue to evolve. Metrics help define the grey areas within which credit professionals often work. Metrics help tell a clear story about different parts of the order-to-cash process and tracking meaningful metrics can unlock success by helping the credit team reach goals, gain recognition and run at the highest efficiency.

Common Metrics in Credit:

·        Days Sales Outstanding (DSO)

·        Total AR aging

·        Overdue %

·        Best Possible DSO

Although these KPI metrics may be highly effective and used in credit, there are some problems that credit professionals may or may not be aware of.

·        Very hard, if not impossible, to really understand performance and movements

·        Very limited operational insight

·        Normally limited to AR/Collections

·        Timing typically limited to month-end

·        Often limited review process

The biggest proponent is the difficulty in understanding performance and movements. “We might have an increasing level of disputes where we’re now allowed to remove disputes from the AR data,” said Christian Terry MCICM MAAT FRSA FCCA , chief executive officer at POP OTC (London, UK) during an NACM webinar, Introducing Weighted Average Days: Order to Cash KPIs You Never Knew You Needed. “When a whole chunk of AR is missing from reports, you can have an increase in write-offs or a change in credit policy. There can be a whole lot of aged debt that we’re not seeing and overtime.”

Problems with DSO

65% of credit departments surveyed by NACM use DSO to measure performance despite its limitations. DSO, a metric that measures the average number of days it takes a business to receive payment for goods and services purchased on credit, is not as favored within the credit department because it is highly influenced by sales.

The key is proving to upper management how highly DSO is driven by sales with extending credit terms. The lower the DSO, the fewer days it takes the company to convert credit sales into cash and the freer its cash flow. The higher the DSO, the longer it takes the company to convert credit sales into cash, which slows cash flow. You can do this by showing them how terms impact the DSO number in your scorecard or dashboard.

Importance of KPIs

KPIs should be at the forefront of credit professionals’ minds if they hope to improve the performance of their credit department. Every metric should drive an action in the credit department, otherwise it is meaningless. Use the results to steer the credit team in the right direction and prioritize tasks, just as you use the dashboard of a vehicle. For example, when the gas gauge gets low, you stop to fuel up. When the odometer reaches a new high, you change the oil. When the check engine light comes on, you take your vehicle to a mechanic. What resources do you rely on in credit to chart a new strategic route?

A way to motivate their team to achieve those goals is to use an objective and key results (OKR) framework, where leaders define objectives as statements that describe what should be achieved or improved. Teams then compose focused, quarterly targets, department by department, to advance objectives.

To learn more about metrics, be sure to download our latest white paper on Beyond the Numbers: The Art of Measuring Modern Credit Department Performance.

You also can join our Metrics Thought Leadership Discussion group to network with other metrics-minded credit professionals.