3 steps for choosing the right credit management KPI’s

How are you making sure that your credit management function is always performing at its best? Key performance indicators (KPI) can help you gauge your performance.

Credit management plays an important role in ensuring the stability and liquidity of any organization, so it is vital to measure its performance through the use of the right performance management targets. After establishing your goals, choose the KPI’s to show you where you stand and if you are moving in the right direction.

Check out these 3 steps to make sure you choose the right KPI’s.

choosing the right credit managment KPI's

  1. Work with the right data for accurate and realistic results

The data you have available will allow you to see where goals need to be set and how far your credit management function still has to go. So it’s important to make sure you have the right information in front of you so you can choose the right KPIs and ensure your targets are accurate and realistic.

This might mean going back and reconsidering your benchmarking and gap analysis strategies, or it might mean you want to make slight changes to your own reporting procedures. However you decide to go about it, your organisation needs to be confident that it has a clear picture of its overall credit management performance and how this is contributing to achieving the organisation’s own goals.

For example, it is impossible to develop a KPI for an organisation’s ageing portfolio if there is not enough data to sort invoices according to how long overdue they are. That’s a very basic example, but there are any number of ways you can sit down to monitor progress and discover the data isn’t there. Take time to understand what information you have before using to as the basis for a decision.

What’s more, the only thing worse than an under-informed decision is a misinformed one, so you should also conduct an audit and ensure all the information is accurate and up-to-date.

  1. Mix top-line and individual KPI’s for maximum insight

A team should be more than the sum of its parts, and there are many benefits to having top-line KPIs that measure the effectiveness of the credit management function as a whole. However, using these targets alone leaves plenty of places to hide for team members who are struggling or need extra support.

Equally, zeroing in on just one key metric is not necessarily the best way to understand how the function or any team member is performing. Strengths and weaknesses can take many forms, and a more holistic view that includes several different KPIs will offer full insight into where processes are falling down or extra training should be given.

Instead of focusing on reductive, individual KPIs, choose a variety that will offer maximum insight into every aspect of the team’s work. At the same time, give individual employees their own KPIs that give them and their managers a sense of how they contribute to the team’s performance as a whole. That will enable you to manage human capital as successfully as your cash flow.

  1. Don’t overestimate your DSO to avoid wrong impressions

Among the commonly used KPIs, day sales outstanding (DSO) is popular for credit management functions. It can have its advantages for organisations. It’s an easily recognisable and well-used metric that allows senior leaders to develop a simple overview of performance when it comes to collecting payments.

However, for many credit managers it is actually quite a reductive measurement as a gauge of the team’s performance. For example, it does not necessarily differentiate between everyday trading and the major projects that organisations may work on with bigger customers. If you offer longer payment terms on those transactions, the headline DSO figure might appear to be increased even though the invoice isn’t actually late.

There are other reasons why DSO can be seen as a reductive means of measuring performance, and there are other metrics that might offer additional insight. If you choose to use DSO as a KPI – and many organisations do consider this standard practice – you may consider balancing this with other measures such as Collections Effectiveness Index, cash conversion cycle or a number of other commonly used measurements. You might also decide to set up some of your own KPIs that reflect your organisation’s specific needs.

Reach your true potential

The most important thing about KPIs is that they need to be part of a constant monitoring and evaluation process. You should be able to retrieve accurate data at regular intervals, and preferably in real time, to use as part of performance reviews for individual employees in the credit management team and the function as a whole.

But crucially, you may find that some KPIs become less relevant as the business changes. Operational and structural reforms may come into play, or other more urgent issues may prompt your organisation to focus on other KPIs. It’s important that along with continual evaluation, organisations maintain the flexibility to adjust and rethink their targets as time goes on.

Measuring performance is vital if organisations are to recognise their strengths, isolate their weaknesses and develop plans to move forward. KPIs can be a helpful tool, but they must be chosen and measured with the help of the right information, accurate analysis and an open mind about how they should be gauged. With all these criteria met, organisations can truly develop the potential of the credit management teams.

Contact or more information?

Do you want to know more about how OnGuard credit management software can help you? Please contact OnGuard via +31 (0)294 256666 or contact@onguard.com. Follow @OnGuardHQ on Twitter or LinkedIn to stay up to date.

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