Managing cash flow is key to your success as a construction business owner. But do you know what's at its heart? It's all about mastering accounts receivable (A/R). When you keep an eye on the right A/R metrics and meet your A/R goals, you pave the way for stronger cash flow and stable financial health.
Want to start optimizing your A/R management? Here are nine crucial A/R key performance indicators (KPIs) that should be on your radar. Keep track of these and watch your construction business grow stronger.
9 Key Accounts Receivable KPIs
Days Sales Outstanding (DSO)
1. Days Sales Outstanding (DSO)
What Does DSO Reflect? DSO measures the average number of days it takes for your construction business to collect payments after a sale or a service has been completed. This is also known as 'days' sales in receivables'.
Why Should Construction Owners Care? Lower DSO suggests a quicker collection of payments, reducing the gap between outflows for construction materials and inflows from completed projects. This is one of the significant accounts receivable goals and objectives examples that you should be aiming for.
What Does this KPI Indicate? This ratio showcases how efficiently your business collects due payments from clients.
Why is this Important for Construction Businesses? A high turnover ratio signifies efficient collections, thus enabling you to pay suppliers or subcontractors on time, ensuring smooth operations and meeting your accounts receivable objectives.
3. Average Collection Period
What is this Metric? This KPI represents the average number of days between invoicing for a project and receiving payment.
Why Does It Matter for Construction Owners? A shorter period suggests your clients pay their bills promptly, leading to healthier cash flows - a critical KPI for the accounting department in any construction firm.
4. Collection Effectiveness Index (CEI)
What Does CEI Indicate? CEI measures your success at securing payments from customers.
Why Should Construction Businesses Care? A higher CEI means more effective collections, ensuring a continuous flow of funds for ongoing and upcoming projects
5. Credit Sales Percentage
What Does this KPI Show? This metric reveals the percentage of your sales made on credit.
Why is this Crucial for Construction Businesses? A lower percentage generally means lower accounts receivable, reducing the risk of cash flow problems.
6. Bad Debt to Sales Ratio
What Does this KPI Measure? It shows the percentage of your sales that have become uncollectible debts.
Why Should I Care? A lower ratio means fewer losses from unpaid accounts, ensuring better profitability - a vital accounting KPI example.
What Does this Indicate? This accounts for the time receivables have been outstanding.
Why Does it Matter to Construction Businesses? Early identification of overdue accounts allows for efficient debt management and helps maintain healthy relationships with clients.
8. Accounts Receivable to Sales Ratio
What Does This Metric Mean? It reveals the proportion of sales remaining as receivables.
Why is it Important for Construction Businesses? A lower ratio implies that your business effectively turns credit sales into cash, helping sustain regular business operations.
9. Percentage of Accounts Receivable More Than 90 Days Outstanding
What Does this KPI Show? This shows the proportion of A/R overdue by 90 days or more.
Why is this Crucial for Construction Owners? A lower percentage means your collections processes are effective, ensuring a steady cash flow which is vital for meeting construction timelines and material costs.
How CCA’s Construction Bookkeeping Services Can Benefit Your Business
Navigating these accounts receivable metrics can be complex. At CCA, we're here to simplify the process.
How CCA's Bookkeeping Services Benefit Your Business | Our Objectives |
|---|---|
Streamlining your A/R Goals | Our experts help you set attainable accounts receivable goals and objectives. We provide industry benchmarks for your guidance. |
Optimizing DSO and Turnover Ratio | We manage your DSO and turnover ratio. Our goal is to ensure timely collections and healthy cash inflows. |
Enhancing Collection Period and CEI | We aim for prompt client payments and efficient collection processes, optimizing your average collection period and CEI. |
Balancing Credit Sales Percentage | We help manage your credit sales percentage, striking a balance between credit sales and cash flow risks. |
Minimizing Bad Debts | We monitor your bad debt ratio, aiming to mitigate losses from unpaid accounts. |
Efficient Debt Management | We provide an aging analysis of your receivables. Our goal is the early identification of overdue accounts. |
Enhancing Cash Conversions | We track your accounts receivable to sales ratio. Our aim is to improve your ability to convert credit sales into cash. |
Reducing Outstanding Receivables | We monitor your percentage of accounts receivable with more than 90 days outstanding, aiming to keep this percentage as low as possible. |
In Conclusion
Managing accounts receivable can be a complex task for construction business owners. But, with the right approach and monitoring the right KPIs, it becomes much simpler and more beneficial.
However, if you'd rather focus on your construction projects, let CCA handle the accounts. We specialize in construction bookkeeping services, ensuring your financial KPIs are met and your business maintains a robust cash flow.
Remember, you're in the construction business to build structures, not to worry about financial metrics. Let us do that for you. Partner with us today, and let's build a solid financial foundation for your business together.
