We have compiled here several control reports for the management of collection operations. We decided to concentrate the super indicators of the collection (profitability, cash flow, customer retention) in the further reporting system section, to provide an overall picture that will reflect the end-to-end credit management and collection. In this section, we have already reviewed several control reports for use by the collection manager, and we will fill in the gaps here.
Status of overdue debtor balances
The analysis of the organization’s delinquent debtor balances is divided into two reporting layers:
- Macro data provides the organization’s management and the credit and collection risk manager an overview of the collection situation in the organization.
- Operational control reports that help analyze emerging trends and draw operational conclusions.
We will first present the super-KPIs:
Diagram 37: Data table of super-KPIs of organization collections – over time:
| Unit | Current month | Last month | Two months ago | YTD | Last 13 months | |
| Sales | M | |||||
| Outstanding debt after deduction of the bad debt provision | M | |||||
| Bad debt provision | M | |||||
| Bad debt provision from annual turnover | % | |||||
| Target | % | |||||
| Bad debt expense | M | |||||
| Bad debt expense from turnover | % | |||||
| Target | ||||||
| Total outstanding debt | M | |||||
| Total outstanding debt from turnover | % | |||||
| Target | % | |||||
| Total overdue | M | |||||
| Total overdue from turnover* | % | |||||
| Target | % | |||||
| Receivables in Days of Sales (DSO) | Days | |||||
| Target | Days | |||||
| Overdue DSO | Days | |||||
| Target | Days |
* Some collection managers will prefer to measure the total overdue from the total outstanding debt. However, we believe that this KPI is biased by collection efficiency. Therefore, we prefer to have all KPIs measured as a percentage of turnover, which is more relevant in our humble opinion.
Outstanding debt after deduction of the bad debt provision
This is the customer section as it appears in the organization’s balance sheets, and it is also the first section that the readers of the report will remember, therefore it is “recommended” for the credit risk and collection manager to get to know this number well, even though at the operational level it is not very useful for him
The accounting meaning of this index is the total amount of debts of the debtor customers, which includes the debts according to the credit terms and also the debts in arrears, after deducting the provision for doubtful debts, that is, after deducting the part of the debts whose collection is doubtful. In other words, the index represents the total debts that the organization believes (here the credit and collection risk manager) that can be collected with a high probability, as long as the organization continues to exist as a going concern.
Bad debt provision
An interesting measure is the rate of provision for bad debts from annual turnover. The division of the amount of debts provided by the amount of the annual sales turnover provides the reader of the report with a long-term comparison tool as well as a comparison with other organizations in the industry or other relevant industries.
If it is possible to distinguish substantially different customer segments (such as private customers and business customers, or different products). It may be worthwhile to present separate indicators for each segment.
Total outstanding debt before deduction of the bad debt provision
The organization’s balance sheet shows the amount of net debtor balances, i.e. after deducting the provision for bad debts. This should represent the true economic value of the debtors (i.e. the organization’s true collectable debt from all its customers). To monitor the true level of the debtors, one should look at the gross debtors’ balances, before the deductions of provisions for bad debts.
Total overdue
The total amount of debts in arrears as a proportion of the sales turnover constitutes the basic index of the collection world. This index is reported up to the level of the organization’s management.
Sometimes we would like to calculate the rate of debts in arrears from the cycle according to the different characteristics or segments of the organization’s customers. For this purpose, we will need to collect the sales turnover data in such a way that will allow us to perform a more specific analysis of the debts in arrears.
Suggested segmentation methods
In the diagram table below, several methods of distribution and the purpose of data collection are proposed.
Diagram 38: Suggested segmentation methods to calculate organization’s sales cycle data and their objective:
| Segmentation | Objective |
| Sales turnover by customer types: large, strategic, institutional, small businesses, private | Distinguish between the rates of delinquent debts among different types of customers. |
| Sales turnover by product lines | When an organization sells substantially different product lines (such as ongoing services and equipment), there may be a distinct difference in the behavior of debtor customers. |
| Sales turnover by methods of payment: open credit, standing orders, credit cards, checks. | Segment the rate of delinquent debts from turnover according to the customer’s payment method, to track any trend changes. |
| Sales turnover according to geographical distribution in the country and customers in the country versus the organization’s customers abroad | To monitor, for example, the rate of debts in arrears of the total sales in the country compared to the rate of debts in arrears of the total sales abroad. |
| Sales turnover by marketing channel | Discover sales quality problems. Sometimes you can identify channels that recruit lower quality customers – they will have a higher delinquent debt rate than other channels. |
Outstanding balances under approved credit
This KPI represents the outstanding balances of customers who are not yet due for payment, under the agreed credit terms.
The percentage of debtors in approved open credit from the annual sales cycle
Sometimes, organizations act as if the collection manager’s responsibility begins and ends with handling delinquent debts. It is important to emphasize here that the responsibility of the collection manager is for all the debts in the organization, including the debts of the customers whose repayment time are not due yet, the approved open credit. This distinction is important because it has a direct impact on the working capital available to the organization.
Distribution of customers over time
Diagram 39: A table showing the distribution of customers (approved and delinquent credit) over time:
| 2020 | 2021 | 2022 | 2023 | |
| Customers in open credit (not due) from turnover | 6% | 8% | 12% | 15% |
| Overdue debt from turnover | 4% | 4% | 4% | 4% |
| Total receivables from turnover | 10% | 12% | 16% | 19% |
The table displays that although the percentage of delinquent debts from the annual sales cycle remains unchanged, the section of debtor customers in the balance sheet is constantly increasing as a result of the increase in credit terms for the organization’s customers (extension of the agreed repayment period), and as a result, the demand for working capital is constantly increasing in the organization.
Days Sales Outstanding – DSO
This index represents an inclusive KPI of the overall activity of the credit and collection systems. But even though it represents the effectiveness of the collection processes – the extent to which the collection processes lead to the desired results, it does not express the quality of the processes themselves, when by efficiency – the intention is to use a minimum of resources to achieve a desired result. The credit and collection risk manager therefore requires additional indicators to examine the quality and efficiency of the organization’s collection systems more comprehensively:
The DSO index represents the organization’s receivables in terms of sales cycle days. The index is calculated as follows:
DSO = (Total outstanding debt/Period turnover) x number of days for the period measured.
The result is expressed in days.
The DSO index has several advantages:
- It makes it possible to compare the ratio between the debts and the sales turnover over time and makes it possible to distinguish the effectiveness trends in the collection process.
- Its expression in terms of sales cycle days is easy to explain and understand.
- Since information companies publish DSO every month for the entire economy and for each industry separately, this index provides an effective tool to compare the effectiveness of the organization in comparison to the rest of the industry or market.
Receivables in Days of Sales (DSO)– approved credit
A similar KPI to the previous one, but here the calculation of the total debts is only for the customers whose credit is not due yet. This number represents the average credit days that the organization gives to its customers and gives a numerical expression to the organization’s credit policy.
Receivables in terms of days of sales – debts in arrears
A KPI similar to the previous two, where the debts are only the debts in arrears. Unlike the previous KPI, it reflects the efficiency of the overall collection and credit system. (The lower the amount, the better the efficiency).
NEXT: Ageing reports