Fast-growing companies: 4 receivables KPIs you must track to scale
Most companies acknowledge the fact that cash is the fuel that powers businesses. But few prioritize effective cash collection. And many are behind when it comes to keeping careful track of whether invoices are paid on time - if at all. This results in businesses struggling to pay their expenses and suffering from cash flow issues.
Cash collection matters! Especially as a fast-growing or VC-backed company.
Upflow co-hosted a webinar with top-notch finance operators on this topic. Keep reading to learn more about key performance indicators as well as automation tools you can use to improve your liquidity levels and stick to high ratios.
In this article, you will find the main takeaways from this productive session. Many thanks to Art Nasser, Finance & Accounting Manager at SafeGraph, Chad Wonderling, SVP, Chief Accounting Officer at Salesloft, and our very own Head of Operations here at Upflow: Côme Chevallier!
Why your company should closely track Accounts Receivables (A/R)
Accounts receivable are an asset on your balance sheet, but they accrue from revenue that has yet to be collected. You can generate a lot of revenue in net credit sales. But if cash does not follow, is it truly working well? That is, of course, a rhetorical question.
“Cash is the lifeblood of your company on a daily basis”, said Chad Wonderling from Salesloft during the webinar. "Doing our daily cash reconciliation is the company brushing its teeth in the morning, it is just a form of good hygiene", he says. "We have to understand where the money is coming from and where it is going on the other side", "no matter what our cash position is, and regardless of the latest funding round we had X number of days or months ago".
Strong collections, cash inflows, and receivable inflows management are also beneficial to alleviate pressure on your organization. Maybe you went over on your Google Ads by a substantial amount, maybe bonuses were higher than expected. Before you know it, there is a hit on the P&L (profit and loss), describes Art Nasser from SafeGraph. "Investors are paying more attention than ever to cash efficiency or starting to add other metrics to measure how you're doing in terms of collecting", he says. Nasser considers that internal monthly meetings or quarterly board meetings can be beneficial to stronger collections.
At its core, cash collection is a business topic and shouldn’t be the sole responsibility of the finance team. After all, cash pays salaries, rents, investment, marketing campaigns, and the such. How do we rally the troops around this issue? For Chad Wonderling, who works for a sales organization developing software for salespeople in the revenue life cycle, the attention put on sales should not distract from the collection of those contracts. "We can never make that assumption", he says.
It is important to educate your revenue teams and build best practices to ensure these topics are well understood and put forward. By celebrating the annual upfront deals more than the average deals and total receivables, explains Art Nasser from a geospatial data organization, companies can "fire people up".
The average employee who is not a finance & accounting professional might not care much for DSO (days sales outstanding), cash inflows, cash outflows, and other accounts receivable metrics. But "incentivizing commissions for upfront deals and tying those to cash” is crucial to make everyone in the company care.
When you're in a fast-growing or VC-backed company, you might be tempted to think that cash is less of an issue. Either because you just raised money, or because you are closing so many deals at once, detailed Côme Chevallier from Upflow. But this whole webinar aims at showing that is not true!
The true cost of late A/R
Late accounts receivable usually hide a deeper issue with the product or other underlying and unresolved customer disputes. Chad Wonderling from Salesloft sees it as a "philosophical opportunity" to enhance the adoption of his product. "When we think of collections, we think of it as slapping the customer on the wrist, but really we can also twist the narrative to be about overall customer experience", he explains.
Bad debt detected too late hinders future growth. It can have a crushing effect on your business. For instance, let's say you have an invoice of 50K that goes into bad debt. If your margin is 33%, you will need to sell twice as much, only to zero out the cost you lost! "Debt can certainly have a big domino effect on the business", says Chad Wonderling.
That is why you need scalable indicators to detect any issues or processes to change. The ultimate goal? Creating feedback loops involving all relevant teams.
Four KPIs your fast-growing company should track to optimize cash collection
1- A/R aging report
First, what is an A/R aging report? It is a visualization of the accounts receivable, grouped by time-to-due dates residing in several buckets, i.e. 30 days, 30-to-60 days, etc. It shows you the current A/R health of your company and gives you insight about your accounts receivable turnover ratio.
Measuring A/R aging weekly helps you detect anomalies in your payment terms and anticipate risks. The data is usually available from your billing or accounting tool. It lets you look at both absolute and relative figures. The 30-60-day overdue bucket is the most common indicator of escalating cash collections.
“At SafeGraph, we use Quickbooks online and have the A/R aging auto-sent to us every Monday". “I recommend looking at it on a customer level because that's where the stories, the whys, come in,'' Art said during the webinar. A great way to attach a name and a face to the balances that you are passed on. The data visualization aspect makes it easy for everyone on your finance and accounting teams to understand and manage risk factors.
SafeGraph uses Upflow to help in that collection process. At Upflow, we integrate with the tools in your financial stack in one click to help your B2B finance and business teams collect customer payments effortlessly.
Before the SafeGraph customer support team enters in, their customers have already received Upflow's automated courtesy that the bill is becoming due. They have also received two automated reminders from the finance teams. "There is almost always a story there", says Art Nasser. Either the customer is facing a cash crush himself, or there was never a good market fit there…
“You would be shocked at the amount of product feedback that billing managers, AR analysts, controllers, whoever is overseeing it, the amount of feedback get on the product”, he said. Communication and awareness are key to ensure the involvement of all teams within the organization, sums up Chad Wonderling.
2- Day sales outstanding (DSO)
The DSO is the average time it takes your company to convert one dollar of turnover into one dollar of cash in your bank account. Why does measuring DSO matter? It gives you a measure of your collections speed, which you can then compare to your payment turns to detect abnormalities within the peer group.
Here are two ways to calculate your DSO:
- The accounting method: you divide your A/R by the sales in a given time and you multiply by the number of days. Very easy to calculate, this formula is subject to seasonality and timeframe inaccuracies, so proceed with caution!
- The countback method: you look at your stock of A/R and count back the number of days of sales that would be needed to zero out that stock. It might be harder to put in place If your tools are not automating that calculation. But it will show more accurate numbers.
“As you expand as a company, you might want to consider segmenting your best possible DSO based on your customers. The enterprise customers won’t give you the same results as your emerging size customers”, says Chad Wonderling. While the DSO is relative and industry-based, it is safe to say that above 50 days, the number is bad or worrying. A high DSO is never a good sign.
Check out Upflow’s DSO cheat sheet to understand how DSO moves when receivable and sales move in your company. Stick to one method and use it regularly. From there, you will be able to create feedback loops, collection policies and action plans with your team.
3- Collection effectiveness index (CEI)
The collection effectiveness index is the percentage of collectible A/R that are effectively collected. TheseCEImeasuresare a lesser-known, more detailed version of tracking the percentage of due or past due invoices through a period of time. The ratio trends towards 100% if all of your receivables are due at the end of a given period. It tells you if you perform well or not, whereas the DSO does not have a due and overdue A/R ratio built-in.
Discover our tool to easily calculate your CEI:
4- Billing cohorts
This cohort analysis method is standard in software product teams and can be used for revenue and collections data as well. It allows you to calculate the percentage of revenues your company collects over time, grouped by buckets (beginning receivable: 30 days, current receivables: 60 days, etc.). This performance metric also showcases your average accounts receivable.
Why does measuring billing cohorts matter? Because they tie everything together. If you read them horizontally, they will tell you if the cash collection strategies are working. Vertically, they tell if you improved over time. Predictability is key for finance teams.
"Working by data cohorts removes some of the noise from A/R and A/R aging numbers", says Art Nasser. That system of accounts receivable management allows you to look at how you are doing with invoices sent on any given month. It also helps to forecast cash and to know how the company is doing in terms of total credit sales, bottom line and collecting.
"We took the billing codework data, the raw data that we were able to download directly from Upflow and I simply charted it out", he explains. He drew a lesson from the chart: get somebody focusing on A/R.
"At that time, we had an outsourced finance team, and nobody was dedicated or spending enough time on collection. We were not collecting anywhere from 60, 90 days, which was not very sustainable. We were swimming in manual collections. That's when I turned on Upflow's templates and automated reminders. I can promise you that an automated and scheduled collections workflow will absolutely improve these trend lines. It allowed us to stop all the bleeding in invoices over 60 and 90 days. We were even able to improve our number of receivables within 30 days, which is pretty incredible given the number of enterprise customers we serve… It has been a huge boost for us", he said.
To conclude, how can CFOs and financial controllers help with collection issues?
- Bring finance into the process sooner
- Structure the commission incentives for the salespeople to be cash upfront rich
- Have the company’s process and procedures in place before that sale is closed
- Automate your messages: your customers will respect you more for it
- Use the best automation tools and key metrics to create that stickiness with the customer and enhance cash flows