AR Realization Time is a KPI that calculates actual duration taken by customer to pay an Invoice. The difference between actual payment date and due date is considered as realization time i.e. actual time taken to pay. In this scenario, only closed Invoices i.e. Invoices for which payment was received are considered.
Sample Calculation: If an invoice due date is 5-Jun-2016 and paid date is 30-Jun-2016, the realization time is 25 days
AR Average Realization Time is nothing but the average of all invoice realization times.
Monitoring this KPI as a organization wide measure is incorrect primarily due to the fact that different customers will have different terms for payment. Since each payment term provides different time frame and customers will avail the additional “credit” days and maximize payment float.
This KPI can be used a mechanism to periodically review effectiveness of different payment terms negotiated with customers. Large deviations from the standard negotiations can raise a flag and one can drill down to customers who have a pattern for late payments and business can re-negotiate payment terms and credit limits based on this data.