Businesses these days are setting strategic goals they desire to achieve. To measure their progress in achieving these goals, they use Key Performance Indicators (KPIs).
Through KPIs, they can tell whether or not they are achieving their goals. Every business and department will use a different KPI to evaluate its success in reaching its targets, including credit collection businesses.
Here are the top 10 KPIs recommended for collections business function:
1. Days Sales Outstanding (DSO)
It is one of the most commonly used KPIs in the consumer lending business. It indicates the average number of days the customer loan has been past due, from the day the payment was due. DSO shows the lender how long, on average, it should take him to collect from debtors. This is a good comparison indicator that can be used to compare and confirm your company’s performance against others in the same industry.
A high DSO is an indication that your organization needs to be more effective in recovering its debts. The number should, therefore, be as low as possible. With DSO, you can easily tell whether or not your business needs improvement. This, however, will not provide you with a more global view of your company’s efficiency. You should use this with other KPIs to get more accurate results.
2. Collector Effective Index (CEI)
CEI is similar to DSO and measures the effectiveness of the individual collector. Therefore, it is another alternative in evaluating your company’s efficiency in its operations. This KPI will show, at each collector level, the amount of money collected in a certain period against the total receivables due for that same period.
The results of this KPI are represented in percentages. A 100% score indicates that the collector has collected all their total receivables invoiced in that time. CEI is best to use when tracking business’ operations for a longer duration.
3. Right Party Contacts (RPC) rate
It is a more specific metric in measuring a business’ efficiency in its debt recovery. RPC will calculate the ratio of all outbound calls made to the person who owes to the industry. A higher number, in this case, means more requests were made to the right party, which shows a high success rate in locating debtors. RPC works on the notion that identifying, placing a call, and connecting to the correct person is the first successful step in recovering business debts and being an efficient collector.
On the other hand, if the collectors and organizations have an RPC rate that is lower than other businesses in the same industry, there is not enough being done to recover debt for the organization.
4. Percentage of Outbound Calls Resulting in Promise to Pay (PTP)
PTP is another significant rate in determining your overall collector efficiency. Making a call successfully to a debtor is a substantial step in recovering debts. However, getting a promise to pay at the end of the call is better for the collector. PTP is measured in percentages, and it shows the percentage of all calls that have been made to a debtor that ends with a promise to pay the debt.
Collectors should work towards keeping this percentage as close to 100 as possible. This would be a more accurate measure of proficiency in recovering the debt. If an individual collector’s rates are lower than others sharing a similar scope, there is room for improvement as far as debt recovery in the organization is concerned.
5. Profit per Account (PPA)
It measures the number of returns on average that each account has generated in collections. This KPI seeks to show the extent that the business is benefitting, even as the collectors continue to follow up on unpaid debts. To get this metric, divide the business’ gross profit over a period by the total number of collections managed within that period.
It is worth noting that these profits can be hindered by certain factors, including operating expenses, revenue, and several accounts managed, among others. Therefore, you may want to keep a close eye on these factors to ensure that they are doing well. This will help maximize the number of profits you receive in the end.
6. Bad Debt to Sales
The number of credit sales owed to the company should write off as bad debts over a period because the debtor cannot pay the business. The bad debts to sales ratio are calculated from the total value of debts and sales. If the ratio value increases over time, the company is extending credit to riskier customers, hence the bad debts.
The bad debt to sales metric is expressed as a percentage. A lower percentage shows that the business is employing effective measures in recovering its credit. On the other hand, a higher percentage means that something has to be done to recover more of the debts.
7. Active Customer Accounts per Credit and Collection Employee
This KPI shows the total number of active accounts a collection employee is handling at a given time to the total number of active accounts the business has. If a collection employee manages more accounts, he will be more efficient in using people and technology to recover the business debts. This value is obtained by dividing the number of active customer accounts by total credit representatives or collectors. The higher the number, the more the company might want to use advanced resources in its debt recovery. This shows great effort on the part of the business in debt recovery.
8. Cost Per Sales Dollar
It uses the number of dollars spent in the credit and collection effort to generate sales. The amount of money the company uses to process each dollar in credit sales is essential in determining the success of its efforts in debt recovery. The cost, in this case, is represented as a percentage of departmental operating costs to credit sales. A collector that has a high percentage indicates a more practical approach towards debt recovery. To determine whether the cost per credit sale is good or not, it is essential to compare it with other organizations in the industry or against past performance.
9. The cost of collections
The cost of collections refers to the cost incurred by the company in bad debt collection. It is a percentage representation of the amount paid to attorneys or collecting agencies against the total collected amount. A lower percentage means that the attorneys or agencies have been more effective in debt collection and that the company's measures are effective.
10. High-Risk Accounts
The High-Risk accounts KPI identifies the bad debt accounts with high value and high-risk potential so they can be collected on a priority. This is meant to maximize profits at the same time minimizing potential losses.
With so many KPIs available for credit collections, one must exercise caution in choosing the most effective tool. However, collectors may be limited to the number of tools they can use because of overall costs for the business. Therefore, it is essential to consider the return on investment offered by ensuring the collectors have all the necessary tools. This will ensure that the results achieved outweigh all the expenses.