Accounts receivable management is one of the few finance functions where performance is directly observable — if you know what to measure. Most businesses track the headline number (total debtors outstanding) but few track the indicators that explain why that number is where it is, or whether it is improving. Here are the metrics that matter and what they tell you.
Days Sales Outstanding (DSO)
DSO is the average number of days it takes to collect payment after a sale is made. The formula is: (accounts receivable ÷ total credit sales) × number of days in the period. A DSO of 35 on 30-day terms means your customers are paying five days late on average. As DSO rises, working capital pressure increases.
DSO varies significantly by industry. Construction and government-related businesses typically see DSO between 45 and 60 days. Retail and FMCG trade creditors often achieve 20–30 days. Compare your DSO to your industry benchmark, not just to your own terms.
Collection effectiveness index (CEI)
CEI measures what proportion of collectible receivables were actually collected in a given period. The formula: (beginning receivables + sales during period − ending total receivables) ÷ (beginning receivables + sales during period − ending current receivables) × 100. A CEI of 95% means you collected 95% of what was collectible. Declining CEI is an early warning that the AR function is losing ground.
Ageing bucket distribution
Your ageing report breaks receivables into time buckets: current, 1–30 days overdue, 31–60 days, 61–90 days, 90+ days. Track the percentage of total debtors sitting in each bucket over time. A healthy ledger has the vast majority in the current or 1–30 day bucket. A ledger with 20% or more in the 90+ bucket has a structural problem that metrics alone will not fix.
Bad debt ratio
Bad debt ratio is bad debt write-offs as a percentage of total sales. If you write off $50,000 in a year with $2 million in credit sales, your bad debt ratio is 2.5%. Industry benchmarks vary — 0.5–1% is reasonable for most B2B trade creditors, but businesses in high-risk sectors or with weak credit onboarding may see 3–5%. Track this annually; a rising trend requires investigation, not just acceptance.
Average days delinquent (ADD)
ADD measures how far past due your overdue accounts are, on average. It is calculated as DSO minus the contractual payment terms. If DSO is 48 and your terms are 30 days, ADD is 18 days. ADD isolates the late-payment behaviour from the underlying sales cycle.
Promise-to-pay kept rate
If your AR team is taking payment promises from debtors, track how many of those promises result in payment within the agreed timeframe. A kept rate below 70% suggests either the promises are not being managed, the collection conversation is not establishing real commitment, or the debtors being called cannot actually pay.
How to use these metrics
Set a baseline, review monthly, and make decisions on trends rather than snapshots. A single bad month may reflect seasonal factors; three consecutive months of rising DSO or a shrinking CEI is a process problem that needs attention. If your AR metrics are heading in the wrong direction, speak to Merion about whether outsourcing the function makes sense.