Controllers and CFOs are tasked with informing business decision-making processes by providing organizational leaders with timely, accurate information about the company’s finances.
In order to gather, monitor, and compile this information, CFOs and controllers typically track several key performance indicators (KPIs). Virtually any financial metric of a business can be designated as a KPI and thus tracked, provided that the financial department has access to the right software and analytics solutions.
One of the most business-critical KPIs that CFOs and controllers need to be familiar with is current accounts receivable (CAR). Here’s how CAR functions, how you can measure it, and why you need to track it.
What is Current Accounts Receivable?
CAR gauges the total amount of money your debtors and clients owe your business. These debts may include fees for services rendered or the cost of goods that you have delivered to them. Although you have not yet collected on CAR, these outstanding debts should be viewed as an asset, as outstanding accounts receivable invoices will eventually be converted into cash.
Tracking CAR will help you estimate upcoming revenue and expected cash flow over the next month. If you invoice customers using a net-60 or net-90 model, it can be more difficult to track CAR, given that some customers may pay invoices the following month, whereas others will likely wait until the deadline approaches to settle their debts.
CAR vs. CAP
Current accounts payable (CAP) refers to your total short-term debt. Typically, the metric will include obligations such as your utility bill, office supply orders, and broadband service fees. It does not include larger, long-term debts such as business loans or your lease.
In other words, CAP is a recurring monthly liability, and CAR is a recurring asset. Subtracting your CAP from your CAR will help you estimate your net revenue. However, you will also need to subtract all other financial obligations from your CAR, including your operating expenses and any extended-term debt payments.
How to Calculate CAR
Calculating CAR is as simple as adding together all of your outstanding customer invoices. For example, suppose that you have three outstanding customer invoices, each of which reflects an amount owed of $1,000. In this scenario, your CAR would be $3,000.
Calculating CAR will help you better understand your cash flow projections for the coming month, and if you have a healthy amount of projected revenue, you can apply some of that excess capital toward growing your business, hiring more team members, and purchasing equipment.
Benefits of Tracking Current Accounts Receivable
Cash flow is the lifeblood of your organization. Without stable, consistent, healthy cash flow, your organization will not be able to sustain its operations. Accounts receivable (AR) are the means by which your business generates revenue, which is why it is vital that you have full visibility of your AR processes, and tracking CAR will enable you to plan for the future.
If you experience a sudden dip in CAR amounts, you will likely experience a cash flow disruption in the very near future. However, if you are aware of this impending drop in cash flow, you can take steps to prepare for it. For instance, you could encourage customers that are on longer net repayment terms to settle their debts sooner in exchange for a modest discount.
Challenges Associated with Ineffective CAR Tracking
Ineffective CAR tracking can put your business in a financially compromised situation, and without tracking CAR, it becomes impossible to understand the financial health of your business, much less project your cash flow and manage revenue.
Poor CAR tracking practices can also cause strain between you and your clients. You should know precisely who owes what at all times, and you need to ensure that your clients receive their invoices in a timely manner so that they can prepare to deliver payment.
Improving Current Accounts Receivable Monitoring
Businesses that are over-reliant on manual CAR monitoring processes often lack adequate visibility. Even if they successfully track the metric, they may find it challenging to analyze it as it relates to other KPIs, such as CAP and working capital.
Fortunately, CFOs and controllers can facilitate optimized KPI monitoring by encouraging their organizations to adopt modern, cloud-based accounting solutions. Such technology provides controllers with powerful KPI monitoring tools, as well as analytics solutions and reporting software.
These solutions enable controllers and CFOs to not only track relevant metrics but generate robust, easy-to-digest reports so that they can inform business decision-making processes.
When searching for such a solution, CFOs should ensure that they select a platform that provides machine learning, artificial intelligence, and automation tools. These solutions will significantly improve overall productivity and promote data visibility. Ultimately, embracing the next generation of accounting and performance monitoring technologies will improve an organization’s competitive positioning within its industry.
Check out the other KPIs in our series below:
