In the food and beverage distribution industry, understanding accounts receivable (AR) KPIs is essential for maintaining cash flow and ensuring that the business has the resources needed to operate and grow. 

Accounts receivable refers to the money owed by a business's customers for goods or services delivered but not yet paid for. Accounts Receivable Key Performance Indicators (KPIs) are a set of metrics used to measure the effectiveness and efficiency of the accounts receivable process for any business. For distributors, tracking these KPIs is critical in order to ensure timely payments from customers, and thus secure the cash required for their operations and growth. 

In this blog, we will discuss the four most important AR KPIs that food and beverage distributors should track; Days Sales Outstanding (DSO), Accounts Receivable Aging, Days To Pay (DTP) and Average Invoice Amount. Understanding and monitoring these KPIs provides valuable insights into the effectiveness of a company's AR management processes and identifies areas where improvements can be made. 

You’ll learn how by closely monitoring these KPIs, foodservice distributors can gain visibility into their customer payment performance, better manage cash flow, reduce the risk of bad debts, and improve their financial performance. You’ll also learn about the industry benchmarks for distributors, and best practices for improving these KPIs. 

Days Sales Outstanding (DSO)

Days Sales Outstanding (DSO) measures the average number of days it takes a business to collect payment after a sale has been made. A high DSO indicates that a company is taking longer to collect payment, which can lead to cash flow problems and negatively impact a company's financial health.

Days Sales Outstanding (DSO) is an important KPI for food and beverage distributors to understand and track, as it provides key insight into how quickly customers are paying their invoices. Tracking the DSO metric gives distributors a better understanding of their overall cash flow, allowing them to manage accounts receivable more effectively. 

To measure DSO, companies should divide the total amount of outstanding receivables by the total sales in a given period. This will give them the number of days it takes on average for customers to pay their bills.

Industry Benchmark

According to Dun & Bradstreet and the Credit Research Foundation Q3 2022 DSO Report, sectors of the food and beverage industry are among the most common distributors getting paid late. For food and beverage distributors, industry benchmarks for DSO vary depending on size and type of business but generally range from 30-45 days. 

A high DSO value could indicate that customers are taking longer than expected to pay invoices or that credit terms have been extended too generously. On the other hand, if a distributor’s DSO falls below industry averages this could signify overly strict payment terms or problems with customer service leading to delayed payments from clients. Regardless of where your company stands compared to its peers, tracking this metric regularly can be beneficial in helping you identify areas where adjustments may need to be made, in order to improve collections performance over time.

Decreasing DSO

Entering your invoices and processing payments manually is extremely time consuming, which means you get paid slower. Without an accounts receivable management system, you also have to follow up on payment requests manually, and have less visibility into customer payment patterns.

Simply updating your AR processes from paper to digital and leveraging automation can improve DSO. With Notch's Accounts Receivable software solution, distributors can automate requests for payment and follow-ups to make the process more efficient. Customers can also set up automated and batch payments, which ensures you receive payments faster, lowering your DSO. Notch also provides visibility into all aspects of the accounts receivables process, from order status, payment history, and cash applications. This way, distributors can easily monitor their DSO at any given time while making necessary changes with customers as they see fit, based on data collected over time. 

With enhanced insights into customer payment performance and automated processes, food and beverage distributors can access the valuable information needed to keep cash flowing correctly within their organization. 

Accounts Receivable Aging

Accounts Receivable Aging is another important KPI for food and beverage distributors to monitor. This metric tracks the average age of unpaid invoices, helping companies identify which customers are paying on time and which are falling behind schedule. A high accounts receivable aging indicates that the company is taking longer to collect payment, which can negatively impact cash flow and create challenges for financial management. 

To track this KPI, distributors can categorize their outstanding invoices by the number of days since the invoice was issued, such as 30, 60, or 90 days and more than 90 days past due. By monitoring accounts receivable aging regularly, businesses can get an accurate understanding of their customers’ payment performance in order to make necessary adjustments accordingly.

Industry Benchmarks

When it comes to industry benchmarks for Accounts Receivable Aging, companies should aim for a low percentage in each category with most invoices being paid within 30-45 days or less. 

The lower the number of overdue bills that have been outstanding longer than 60 or 90 days, the better – as these will have a larger impact on cash flow over time if they remain unpaid. Keeping up to date records of accounts receivable aging allows companies to quickly identify any potential issues with customer payments before they become too severe so appropriate action can be taken when needed.

Decreasing Accounts Receivable Aging

To decrease their Accounts Receivable Aging, food and beverage distributors have a few options. One approach is to offer early payment discounts to incentivize customers to pay more quickly. Distributors can also implement a more streamlined invoicing process, including automating invoice delivery and payment reminders. Additionally, regularly reviewing and updating credit policies and terms can help prevent overdue accounts and minimize the time it takes to collect payment.

Notch's accounts receivable solution can help distributors decrease their Accounts Receivable Aging by providing automated invoice reminders and payment tracking. The platform also allows distributors to easily monitor payment trends and identify customers who consistently pay late. By implementing these strategies and using tools like Notch's accounts receivable solution, food and beverage distributors can reduce their Accounts Receivable Aging and improve their overall financial health.

Days to Pay (DTP)

Days to Pay (DTP) is a crucial AR KPI for food and beverage distributors to track, because it measures the average number of days it takes a customer to pay an invoice after it has been issued. A high DTP can indicate that a customer is having cash flow issues, and may not be able to pay their bills on time. Tracking DTP can help distributors identify payment issues and take proactive steps to address them.

To measure DTP, companies should calculate the average time between when an invoice is issued and when it’s paid, by taking the total number of days from all invoices issued during a given period and dividing them by the total number of invoices paid. 

Industry Benchmarks

Industry benchmarks for DTP vary depending on size and type of business but generally range from 15-30 days depending on the specific sector of the foodservice distribution – with most companies aiming for an average below 20 days. A high DTP value could indicate that there are certain processes or procedures within your business slowing down customer payments, or that credit terms have been extended too generously resulting in longer wait times before payment is received. On the other hand, if a distributor’s DTP falls below industry averages this could signify overly strict payment terms or problems with customer service leading to delayed payments from clients.

Decreasing DTP

To decrease Days to Pay (DTP), food and beverage distributors can implement several strategies. One approach is to offer customers various payment options, such as credit card, online payments, or direct deposit, to make the payment process more convenient. Additionally, distributors can consider incentivizing early payments by offering discounts or other incentives to customers who pay within a specific timeframe. By streamlining the payment process and providing customers with incentives to pay early, distributors can decrease their DTP and improve their cash flow.

Accounts receivable solutions like Notch can also provide automated payment reminders and real-time payment tracking, making it easy for distributors to monitor DTP and take action to address any payment issues. 

Average Invoice Amount

Average Invoice Amount is an important KPI for food and beverage distributors to monitor, as it can provide key insight into customer spending habits. This metric measures the average amount of money customers spend per invoice, helping companies identify areas where they may be over or undercharging for goods and services provided. Tracking this metric regularly can also help organizations better understand their customer spending patterns and make adjustments accordingly in order to maximize profits.

A high Average Invoice Amount could indicate that customers are purchasing more products or services than usual – which could mean increased sales if managed properly. On the other hand, if a distributor’s Average Invoice Amount falls below industry averages this could signify missed opportunities to upsell additional items or problems with pricing leading to fewer purchases overall from clients.

To calculate Average Invoice Amount, businesses should divide the total value of invoices issued during a given period by the number of invoices sent out. 

Industry Benchmarks

Industry benchmarks for Average Invoice Amount can vary depending on the specific sector of the food and beverage distribution industry. For instance, distributors specializing in high-end gourmet foods may have a higher Average Invoice Amount than distributors focusing on everyday staples. Similarly, distributors selling to larger businesses may have a higher Average Invoice Amount than those selling to smaller retailers.

That being said, as a general rule, food and beverage distributors should strive for an Average Invoice Amount that maximizes their revenue while remaining reasonable and appropriate for their customer base. A good benchmark to aim for is an Average Invoice Amount that is high enough to generate healthy profits, but not so high as to discourage customers from purchasing. 

Distributors can also benchmark their Average Invoice Amount against their competitors in the industry to gain a better understanding of where they stand. By analyzing their competitor's Average Invoice Amount, distributors can identify areas where they can improve their own sales strategy and stay competitive in the market.

Increasing Average Invoice Amount

Distributors can consider offering volume discounts or bundle deals to encourage customers to purchase more products per invoice. To improve their Average Invoice Amount further, food and beverage distributors can analyze their customer data and identify any patterns in their purchasing behavior. For instance, they may find that certain customers tend to purchase larger quantities of specific products, and adjust their sales strategy to better target those customers. 

Notch's accounts receivable solution can provide distributors with real-time data on invoice amounts and sales patterns, making it easier for them to optimize their sales strategy and improve their Average Invoice Amount. By optimizing the Average Invoice Amount, distributors can increase their sales revenue and improve their overall financial health. 

Tracking the right KPIs is crucial for food and beverage distributors to maintain a healthy cash flow and overall financial health. 

The four KPIs discussed in this blog, Days Sales Outstanding, Accounts Recievable Aging, Days to Pay, and Average Invoice Amount, are among the most important KPIs for food distributors to track regularly. By monitoring these KPIs and striving for industry benchmarks, distributors can identify potential problems in their financial processes, pinpoint areas for improvement, and optimize their sales strategy to maximize revenue.

With the help of modern accounts receivable solutions like Notch, distributors can automate and streamline their accounting processes, allowing them to focus on running their business more efficiently and effectively. Tracking these KPIs, food and beverage distributors can set themselves up for long-term success in the competitive and ever-changing food distribution industry.