As the recent Credit Today Survey on staffing challenges revealed, more than two-thirds of credit staffers are working remotely. This creates new challenges for credit managers and senior management, who want to keep a close watch on their teams' performance. In addition, transparency of credit and collection performance trends is key to working capital management and a company's liquidity.

So, what are the essential metrics you must track?

Many Credit Managers track DSO, the Collection Effectiveness Index (CEI), Percent Past Due, and the Average Days Past Due to understand their department's performance and trends. However, there are many other metrics you must track to measure the remote workforce's efficiency and effectiveness.

It's difficult to improve what you don't measure.

Let's take a look at additional ways to track each of the credit department's functions:

Credit Performance Measurements: Credit decisions affect new account processing, requests for credit limit increases, swift action if there is an erosion in collections, and the release of credit holds and pending orders. The following measurements could help you understand if the decisions are timely and accurate.

1. Average time required for a credit decision from receipt of a complete credit application.
2. Approved Credit Percentage = Approved Credit x 100/Total Credit Reviews
3. Bad Debt to Sales = Bad Debt Net of Recoveries/Credit Sales

Collection Performance and Efficiency Measures

Collection results depend on two things: timeliness of collection contacts and account penetration. It reveals collector's proactiveness and effectiveness in making necessary contacts through calls, emails, or other channels. A deteriorating trend may indicate low productivity. To improve this trend, you may have to think about staff increases, overtime, or collection automation to reach the targeted results.

Also, look at the number of third-party referrals and an agency's collection results. It would help you calibrate the effectiveness of your credit policy and how credit analysts and collectors are performing.

The percentage collected by an agency could tell you about inaccurate credit decisions and collections efficiency. A lower value may indicate that the credit lines approved were incorrect. A high percentage collected by the agency may reflect poorly on your department's collection practices. In either case, it may be time to review the credit policy and the collections process. The following measurements can help you determine when that is needed:

1. The days from an invoice due date to the first collection call or contact
2. The days from the first contact to when a second contact is made on unresolved balances
3. A deteriorating trend of balances over 90 days past due
4. Percent collected of the beginning A/R each month
5. Aging bucket improvement between periods
6. Third-party collected percentage = Collected Amount/Amounts Referred
7. Bad debt losses as a percent of sales in the collector's assigned account portfolio

Cash Application Performance Measures

For a credit manager to handle credit and collections, they need to understand and maintain the accuracy and timeliness of a remittance-invoice matching. If a customer's shipments are on hold due to delayed payments, they expect their goods to be released as soon as they pay. However, if there is any delay or inaccuracy in cash application, the collectors would still see the invoice as not paid and hence keep following up. It will lead to unnecessary additional time and effort, annoyed customers, and degrading customer relationships.

1. Measuring Remittance Application Timing:

     a. Time from receipt to the application to the correct account

     b. Time from receipt to the application to the correct invoice(s)

2. Measuring Remittance Application Accuracy and Efficiency:

     a. Accuracy: The first pass- percent of invoices accurately applied

     b. Transaction Turnover per Cash Application Analyst: Annual Transaction Processed/ Average Number of Cash Application Analyst FTE's

3. Operating Cost per Transaction: Annual Cash Administration Operating Costs/Annual Number of Transactions Processed

Dispute and Deduction Management Performance Measures

Disputes and short payments could reflect process breakdowns and administrative errors on your company's part. They also provide insight into erroneous claims by a customer because of their mistakes, or payment delay tactics. The following measurements bring transparency to deductions(chargebacks) and short payment trends. They will help identify the root causes of deductions. Hence, helping you save time and expenses, thereby allowing your limited staff resources to focus on collections.

1. Days Deductions Outstanding (DDO): Ending AR Value of Deductions x Days in the Period/Total AR Value of Deductions Taken During the Period

2. Deduction Turnover: Open # Deductions Beginning of Period + New Deductions During the Period/The Number of Deductions Open at the end of the Period

3. Time from identification to the resolution of a deduction

4. DDO Trends Over Time in Total, and by Deduction Type

Credit decisions, collections performance, and the other department activities impact your company's cash conversion (cash-to-cash) cycle in many ways. Decision timeliness and accuracy affect inventory staging and turns, the sales and cash forecasts, the need for borrowing, access to working capital, and customer care.

These performance metrics will help you monitor the effectiveness of your credit policy, processes, and staff. You will be able to benchmark results with similar companies and individual staff members with their peers. If things are trending in the wrong direction, you will have the insight to make improvements of benefit to your company.

For more information, here's a 15-minute video to understand credit KPIs in detail.