In a data-driven business world, knowing how to use data analysis tools optimally and what the advantages of data models are will allow you to assess the efficiency of your Accounts Receivable department. Predictive analysis can help monitor and manage outstanding receivables, and post-collection data will identify the most effective payment recovery methods.
Main KPI’s to Measure Recovery
These are the main Key Performance Indicators (KPIs) used to measure recovery or collection of receivables:
1. The Collection Effectiveness Index (CEI) is a metric that calculates the total receivables over a certain period of time and the percent that is actually recovered over the same period.
2. Profit per Account (PPA) is exactly what it says: the average profit made for each account, calculated by dividing the gross profit of the company by the total number of accounts receivables.
3. Turnover ratio. Account turnover ratio measures the company’s effectiveness in recovering money owed by customers.
(Formula: Account Turnover Ratio = Net Credit Sales / Average AR )
To improve the account turnover ratio, may businesses and medical practices transfer delinquent accounts to a medical collection agency or a small business debt collection agency. Professional debt collectors can help in reducing average AR, thereby improving your account turnover ratio.
4. Cash-to-cash cycle time (CCC) is the period of time between when your business pays your suppliers and when you receive payments from your customers. This is usually expressed in days.
5. Average Days Delinquent (ADD) indicates the average number of days your invoices are left unpaid after the past due date.
6. Days Sales Outstanding (DSO). This KPI may seem directed mostly at merchants, but service providers also use it. It refers to the average collection period after a sale has been made or a service has been provided.
Why is Data Analytics Important?
Small businesses often ignore the benefits of this intimidating process, but it can be as sophisticated or as simple as you need it to be. Regardless of whether you use basic charts and graphs in Excel every now and then, or pay for a complex program which requires training, its benefits are hard to ignore. The best and easiest way to start is with a batch of sample data in an Excel file, so you can get some initial perspective on and familiarity with your company’s data using the metrics above and so you can see if the amount of work to analyze your data points to a need for outside assistance.
Admittedly, every business, big or small, faces challenges converting data into information or, even more importantly, actionable insights. The main reason for that is that data lives in one or more LOB (Line-of-Business) Applications, a variety of files on disk, email, or even paper documents. Depending on how you maintain your records, data integration, cleansing and curation are complex and expensive, particularly as the number of accounts grows. They often require professional help and know-how outside the budget of small companies. Data analysis becomes difficult when you’re dealing with unstructured data and, for that reason, keeping up-to-date and complete records is very important not just for having seamless processes but also for decision-making.
Benefits to Your Company
Here are some ways data analytics can benefit your company:
1. Identify top clients or payors with outstanding receivables records. This helps answer many questions. You don’t know where your money comes from? Do you want to pay special attention or send a gift basket to your 5-10% best customers for the holidays? Your data warehouse contains a wealth of client information. You can identify themes and trends, customer satisfaction or dissatisfaction, and more.
2. Assess payments at risk of default as well as map out demographics at risk. Your customer data can help you find out why your sales are collapsing and what is causing it. Some data tools can even help you perform AI tasks such as Sentiment Analytics on the feedback you receive from your clients. Addressing negative comments on your website could save your business.
3. Monitor the collection period for various receivables. If your collection period is 30 days, and a customer takes, on average, 25 days to pay, you have a pretty good system of collecting on your receivables. If, on the other hand, a customer takes 35 or more days, you must find a way to reduce that period. The Average Days Delinquent (ADD) metric can be used here.
4. Understand your AR turnover ratio fluctuations: Having a high AR turnover ratio is a good thing, but you don’t want it to go to any extremes due to the impact it may have on client payment behavior. Comparing various values over several quarters or years will help you determine when to change your debt collection methods.
For example: Dental surgeons often engage in intensive debt collection tactics because their balances are high and dental surgeries for the same customer are not so common. They do not have a massive fear of losing existing customers. Contrary to popular belief, a dental collection agency should ideally be instructed to engage in moderate or diplomatic collections since intensive techniques can tarnish the reputation of any medical practice, dental office even a small business. Intensive collection tactics also raise the probability of a counter lawsuit from debtors.
5. Evaluate how the length of delinquency and the value of those receivables you have to turn over to external collections affects your bottom line. Sometimes, you may want to keep a customer in spite of repeated delinquencies, but a few graphs showing several billing cycles may help you better understand if it’s worth keeping them.
6. Identify your strongest collection method. When money pours in, it’s easy to just enjoy it and not do the hard work of planning for the future. One glitch in your website’s payment capability, one employee who leaves, or conversely, the nicely worded ‘thanks’ message that accompanies emailed billing notices, or that month-long promotion, may make the difference between procrastinators or delinquent customers and on-time receipts.
7. Identify when your invoices are likely to be paid. Predictive modeling can offer insight into how you can proactively collect on invoices that are likely to become delinquent.
8. Rely on your cash-to-cash cycle. A successful business has a regular and predictable billing and collection system, where the cash-to-cash cycles are generally low. Data analysis can indicate where they remain low and where they tend to spike.
9. Assess and improve the efficiency of your referral network. If you have such a network, you can analyze which referral channel works best for your business. You can then optimize it or try to accumulate similar sources of referrals so you can increase your revenue.
Data Analytics Improves Data Integrity
These are only some ways data analysis can improve your business and contribute to your success. More and more internet and software providers offer tools to facilitate learning and using data analytics and visualizations. One of the major features of these tools is the automation of numerous processes. For instance, Microsoft Power Automate, allows business users with no coding experience to integrate MS Office products with other applications easily.
This allows emails upon arrival to be processed and stored in the LOB Application eliminating the need to do this by hand. Another use is sending automatic notifications internally or externally when specific events occur. Workflows can be implemented with little effort to eliminate manual tasks and improve data consistency and quality.
With data integrity, the data consistency across systems, resolved, a business can derive some actionable insights. With automation comes efficiency, predictability and reliability. When the time comes for an internal or external audit, you can count on your data to minimize risks and standardize successful workflows. All of these can drive your medical practice or small business forward, and help you save time and money down the line.