How to Improve Accounts Receivable Turnover

What is Accounts Receivable Turnover?

Accounts receivable is what your company is owed from your customers. It follows then that accounts receivable turnover is a ratio of how often your business collects the money that is owed to you, your accounts receivable, during a year. The accounts receivable turnover ratio is calculated by dividing the net credit sales by the average accounts receivable. This ratio is a valuable metric used to measure how efficient your business is at offering credit to customers and then receiving what you are owed.

Why should you care about your accounts receivable turnover?

For this metric, the higher your ratio, the more efficient your company is at collecting your accounts receivable over the year. Also, increasing your accounts receivable turnover means you have more cash on hand for all of your expenses. This could building expenses, taxes, or emergency funds. Also, if you have a low ratio, then that could mean your customers are not financially reliable. Or it could mean that your collections are not working in the most efficient manner. The following tips will help improve your accounts receivable turnover ratio.

How do you calculate your Accounts Receivable Turnover?

The accounts receivable turnover ratio is calculated by dividing net credit sales by the average accounts receivable. The time period for both sets of data needs to be the same for this calculation. The net credit sales is the amount of money your company has received from credit over a period of time. This is calculated by calculating the returns and discounts on credit sales and subtracting that and other reductions from the gross credit sales.

First, you will need to calculate the average accounts receivable. This is calculated using the following formula: (beginning accounts receivable + ending accounts receivable) / 2. For example, with a beginning accounts receivable being $150,000 and an ending accounts receivable of $50,000, the average accounts receivable is ($150,000 + $50,000) / 2 = $200,000 / 2 = $100,000.

To calculate the accounts receivable turnover use the following formula: Net credit sales / Average accounts receivable. For example, with a net credit sales of $2,000,000 and an average accounts receivable of $100,000 the accounts receivable turnover is (2,000,000/100,000) = 20.

Tips for improving your Accounts Receivable Turnover

Be organized

Keeping your documents, accounts and bills organized is time-consuming but it is worthwhile. It will also help when it comes to figuring out what you are owed. Organization of your documents can also help you easily access all the information needed to provide accurate bills.

Invoice promptly and accurately

Billing your customers promptly is important. Combined with also accurate and detailed bills means your customers will be more willing to pay the bill. Also, make sure to bill often. This means, don’t wait until customers owe a lot to send a bill. Sending bills often means the bills will be for lower amounts. Customers are more likely to pay a smaller amount, and billing often means that the customer would have a lower chance of forgetting about what they owe you.

Build client relations

It is important to build positive relationships with your customers. If your customers are happy with your quality of service the chances of them paying will go up.

There are many ways to improve the relationship you have with your customers. For example, you could give them a follow-up email or call to check up with them. Being present during customer service issues is helpful to make sure they know you care about their concerns.

Reduce the barrier to paying invoices

Making payments convenient means that your customers are more likely to make those payments on time. There are multiple digital services that can be used to receive payments. If you are accepting cheques or wire transfers, services like Plooto or Bill.com provides ways to automate accounts receivable.

For payments through a credit card, companies like PayPal, Stripe, or Square are all useful for accepting credit card payments. These services are not free though and they will take a cut, but the convenience of them and getting prompt payments are worth seriously considering.