Learn How to Improve Accounts Receivable Turnover

Running a business isn’t always a walk in the park, especially when you’re dealing with the financial side of things. However, understanding the intricacies of business efficiencies can make your entrepreneurial journey significantly smoother.

At Yeater & Associates, we understand the ups and downs of business ownership, and we’re here to share some valuable insights, especially for those who are navigating the maze of business operations and banking. Today, we’ll discuss how to improve accounts receivable turnover – a critical aspect of managing your business finances.

Understanding Accounts Receivable Turnover

Learning how to improve accounts receivable turnover is crucial, because it measures how efficiently you collect payments from your customers. A high turnover ratio indicates that you’re turning your outstanding invoices into cash quickly, which means more liquidity to pay bills, your team, and other expenses.

Calculating Your Accounts Receivable Turnover

Now, let’s break down the formula a bit more:

Accounts Receivable Turnover = Net Credit Sales ➗ Average Accounts Receivable

Net Credit Sales: These are the total sales made on credit during a specific period. It’s the revenue generated from customers who haven’t paid immediately but will do so at a later date.

Average Accounts Receivable: This involves finding the average of your accounts receivable at the beginning and end of a particular period. The formula is outlined below:

Beginning Accounts Receivable + Ending Accounts Receivable ➗2 = Average Accounts Receivable

So, if your net credit sales are $100,000 and your average accounts receivable is $25,000, your accounts receivable turnover is 100,000 ➗ 25,000 = 4.

Interpreting Accounts Receivable Turnover

A higher accounts receivable turnover is generally considered better, as it implies that your business is efficiently converting credit sales into cash. However, what’s considered a “good” number can vary across industries. For instance, a ratio of 5 might be excellent for one business but below average for another. It’s crucial to compare your turnover ratio with industry benchmarks or your own historical performance.

Now, armed with a clearer understanding of the formula, let’s explore some strategies on “how to improve accounts receivable turnover” and keep your business’s financial heart beating strong.

6 Strategies on How to Improve Accounts Receivable Turnover

1. Crystal Clear Payment Terms:

Specify clear payment terms in your invoices, so there is no wiggle room.

You can even offer discounts for early payments and consider implementing late payment charges. This not only incentivizes prompt payments but also sets expectations right from the start.

2. Discounts for Early Birds:

Encourage your customers to pay early by offering discounts. A small discount can go a long way in speeding up the payment process and improving your turnover ratio.

3. Streamlined Payment Methods:

Make paying invoices a breeze by accepting a variety of payment methods. Beyond traditional checks and wire transfers, explore digital payment options to cater to a wider audience. Convenience for your customers often translates into quicker payments for you.

4. Pre-payments and Deposits:

Eliminate accounts receivable by considering pre-payments or deposits, especially for larger projects. While this might not be suitable for all businesses, it can significantly reduce the risk of late or non-payments.

5. Consistent Follow-ups:

Regularly follow up on outstanding invoices. A friendly reminder can go a long way in nudging your clients to settle their dues promptly. Automation tools can help streamline this process, ensuring you’re not spending excessive time on follow-ups.

6. Build Strong Client Relationships:

A healthy relationship with your clients can lead to more timely payments. Open communication channels, understanding their needs, and delivering exceptional service can create a positive environment where clients are more likely to prioritize settling their bills promptly.

Remember, learning how to improve accounts receivable turnover isn’t just about the numbers; it’s about ensuring a steady flow of cash to keep your business thriving.

Enlist Professional Help

At Yeater & Associates, we understand the challenges small businesses face. Our expertise in accounting and bookkeeping, coupled with financial advisement, can provide the support you need to enhance your financial management strategies.

Get in touch to learn more about how we can partner with you on your business journey. Let’s unlock the full potential of your business together!