Accounts Receivable process can be tricky to handle. Businesses lose revenue if they’re unable to convert their accounts receivables into cash. Here’s how much this process costs businesses: –
- On average, most firms characterize 1.5 percent of unrecovered receivables as bad debt. For businesses worth $50 million, that percent amounts to a whopping $750k yearly expense.
- Greater than 90 percent of businesses go through late payments from their clients.
- It takes an average of 34 days before firms get paid.
What is Accounts Receivable Turnover?
Table of Contents
- 1 What is Accounts Receivable Turnover?
- 2 How to find Accounts Receivable Turnover?
- 3 Why this Ratio Matters?
- 4 How to Increase your Accounts Receivable Turnover
- 5 Conclusion
This turnover computes the effectiveness of your organization at translating its credits into cash. You can calculate your capacity to recover costs from your clients effectively and timely through the accounts receivable turnover ratio.
How to find Accounts Receivable Turnover?
You can compute this ratio by dividing the net credit sales value by the average accounts receivable value. Here, net credit sales denote the complete credit sales for a particular financial period minus the costs of return and replacement. Average accounts receivable is an average of beginning receivables amount and ending receivables amount.
Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable
Why this Ratio Matters?
Normally, the greater this ratio is, the more disposable cash you have to pay other firm expenses. Having a lower ratio indicates grave trouble for the organization’s finances. These are a few implications of a poor account receivable ratio: –
- Poor credit control policies
- The Inefficient customer collections process
- The Financially inconsistent client base
Tracking this ratio helps businesses maintain their balance sheets and protect their company’s financial wellbeing.
How to Increase your Accounts Receivable Turnover
1. Enhance Your Billing Efficiency
Companies adhering to manual processing spend only 20 percent of their time communicating about the payment with their clients. Whereas, companies that use accounts receivable automation software spend 62 percent of their time talking about payment.
Sending your invoices quicker is an easy way to ensure you clear your payments efficiently. Ideally, your team should aim to make and send invoices as soon as you complete the work. Also, discuss your payment methods and terms in advance with your customers to prepare them for the invoices.
2. Invoice Accurately On-time, Every Time
61 percent of late payments occur due to administrative problems like erroneous invoices or late invoice processing. Generating an accurate and detailed bill helps businesses and their clients complete the payment process well. However, it’s critical to process payments in recurrent and punctual billing cycles to improve the turnover ratio. By processing invoices late, you set a harmful precedent that your business allows late payments.
Waiting for a long time before billing your clients is a huge mistake a firm can make. Also, late payments increase the chances that your client has already moved on from your products. Invoicing regularly also reduces the payment bill-wise and makes it easier for your customers to complete the payment.
3. Reward Efficient Payments
Sometimes, a small incentive can go a long way. By providing perks like discounts, free shipping or delivery, and gifts for early payments, you encourage your customers to clear dues quickly. You could also use points and coupons to motivate future purchases by incentivizing your clients. With regular early payments coming in, you hit your target turnover ratio, improve cash flow, and build a successful business.
4. Use Cloud-based Software
67 percent of accountants prefer using cloud accounting software. This software eases billing and accounts receivable processes by giving greater financial data access and collaborating well with your accounting team. Tools like Xero and QuickBooks online are perfect for small to mid-level businesses because they have more easy-to-use features. These tools also allow easy integration with various time tracking software to log time entries in your invoices.
Connecting with different analytics tools help these tools track cash flow efficiently. Through cloud-based software, businesses can automate repeat invoices and send follow-up reminders frequently.
5. Build Strong Customer Relationships
Every organization benefits from having a close relationship with their clients. By building a great connection with your customers, you can improve your accounts receivable processes immensely. A satisfied customer base is more likely to pay for services on time and improve your turnover ratio. You can foster good relations with your clients by checking in with them regularly via calls, emails, or other preferred mediums.
6. Ease the Payment Process
Increasing the number of ways your clients can pay you eases the payment process significantly. Simpler payments facilitate quicker processing by easing your customer’s accounting team’s issues. You can no longer work on accepting only cheques and wire transfers as viable payment solutions. By accepting electronic funds transfer and credit card payments, you speed up your payment processes at the brink of a hat.
Various tools like Plooto and Square ease the payment receiving process via cheque, wire transfer, and credit card. For a small commission fee, you end up receiving many benefits that increase your turnover ratio significantly.
7. Diversify Your Client Base
Bagging contracts from large corporations is a great achievement for many small companies. However, small companies should be cautious before they abandon their services to other clients due to this contract. Many large corporations stretch out payments to a maximum of 120 days which is a lot of time to go without payments.
That’s why we suggest you diversify your client base to maintain healthy cash flow in the business. So, keep your eye on the sky by having a few large clients, but also remain grounded by providing services to smaller clients that pay early. Have a healthy balance of large clients and small clients to avoid starving your accounts receivables.
Receiving money for your business’s effort is a confirmation of all the value you provide for your clients. Manual accounts receivable processes can become extremely cumbersome. Hence, if you can, consider investing in good accounting software that eases the burden on your staff. By automating your invoices, you save time and money in the long run.
Outsourcing Accounts Receivable process is another alternative that can drastically improve your organization’s Accounts receivable turnover effectively.