How to increase accounts receivable turnover: 10 useful tips
Small company owners frequently give customers credit, enabling them to postpone payment for services or items. Accounts receivable refers to money owing by customers for products or services previously given. Improper collection management causes cash flow issues as business owners strive to balance receivables against payments to suppliers and invoices.
If you operate a business, managing your Accounts Receivable (AR) turnover should be at the top of your priority list. This is because the money you generate will only be reported as income when it is received from your clients, not when it is borrowed.
As a result, the smoother your Accounts Receivable methods, the higher your chances of collecting consumer payments and enhancing your cash flow. This practice will not only result in long-term business success but will also receive your accounts payable procedure.
In this blog, we'll let you know 10 useful tips to increase your accounts receivable turnover.
1. Accounts Receivable Turnover Ratio
When you want to optimize your accounts receivable and increase your turnover, you should know where you stand. It can be done by quickly knowing your current account receivable turnover ratio.
The Accounts Receivable Turnover ratio is calculated by adding together beginning and ending accounts receivable to arrive at the average accounts receivable for the measurement period and divide into the net credit sales for the year.
The formula for calculating the accounts receivable turnover ratio is:
AR Turnover Ratio = Net credit sales / Average AR
Net credit sales = Sales on credit - Sales returns - Sales allowances
Average AR = AR(beginning of the year) + AR(end of the year) / 2
Lower figures equate lower collections ratios, which implies your company is not being paid and is accruing debt. Conversely, greater numbers equate to higher collections ratios, which indicates you're getting paid and your cash flow is improving.
2. Recheck your Account Receivables
Change the loan conditions offered by a firm to increase the ART fast. Reduce the time a consumer has to pay a bill to enhance the ratio (provided the customer pays). Change credit procedures so that bills are sent out quickly. Accounts Receivables collections must also be closely monitored. The ART ratio shows if the activities done are having a beneficial influence on the accounts receivable turnover.
3. Produce an Account Receivables Turnover Aging Report
An accounts receivable Turnover aging report tracks and measures all your clients' payment status. Accounts are classified based on the number of days after the invoice was issued (for example, 0-30 days, 31-60 days, 61-90 days, and beyond 90 days) and the amount owed. This allows you to identify possible collection issues early on before accounts become severely past due. In addition, this enables your AR department to concentrate your collection efforts more effectively.
4. On-Time Invoicing
Invoice on time and appropriately. If invoices are not sent out on time, money will not be received on time. Another strategy to boost the company's cash flow is to issue accurate and timely invoices. Companies that exclude clients from paying on time will suffer in the long term. As a result, your organization must issue bills as soon as the client uses the services. Invoices that are issued late may allow your clients to avoid paying the due amount. So be prudent and cautious while billing your consumer. Remember that clients are more hesitant to pay a quarterly or yearly invoice than a monthly charge.
5. Use a cloud-based accounting management system
Cloud accounting software focuses on the time-consuming aspects of the billing and accounts receivable processes. A Cloud accounting software can assist you in expediting the invoicing process while maintaining accuracy.These technologies greatly simplify your billing and accounting operations. You may simply access your data and engage in real-time with the accounts team. You may collaborate with the bookkeeping staff in real-time and access financial data 24 hours a day, seven days a week, using cloud software.
6. Specify the Conditions of Payment
If you don't explicitly define payment conditions, you can't expect your clients to pay their bills on time or early. Be sure you include your payment terms in all of your agreements, contracts, invoices, and other client correspondence. If you follow these steps, there won't be any unpleasant surprises, and your collection team will be able to get the money they need when they need it.
To successfully manage your accounts receivable, provide clear payment conditions on your invoices. Typically, late fees are computed as a percentage of the total invoice amount. Setting credit limits or offering payment plans is a fantastic option if you sell more expensive items or services.
7. Provide Multiple Payment Options
Outdated payment mechanisms impede the account receivable process. The introduction of additional payment options will encourage the customer to meet the payment obligation on time. If possible, try to replace outdated payment methods like wire transfers and checks with more modern ones like credit cards and electronic cash transfers.
8. To Provide Discounts or Rewards
You may lower your AR expenses by encouraging clients to pay in advance rather than using your usual customer credit terms. When attempting to improve your accounts receivable turnover ratio, incentives might be a helpful tactic. Give your clients a perk for making early payments on their bills. You don't have to spend a lot of money on these incentives; you may just give them little presents, free shipping, or tiny discounts.
Most of your consumers would likely be sufficiently encouraged to pay you sooner through these incentives. With incentives, your customers are more likely to pay you, which boosts your accounts receivable turnover, improves your cash flow, and makes your company run more smoothly.
9. Boost the effectiveness of your collections
To make it simple for customers to pay on time, employ an automatic clearinghouse, pre-authorized checks, or a lockbox service. Customers can conveniently deposit payments in a lockbox or post office box for the bank to pick up. With the aid of preauthorized checks, a business can take money out of a customer's account at predefined intervals.
Funds are electronically transferred from customer accounts to the business's account using automatic clearinghouses. Even if this method of controlling receivables may be the finest, it cannot be used in a wider context.
An established business or other organizations that deal with expensive goods or have a well-known brand in the market have pre-payment plans in place. It could not be an option that makes sense for the new businesses.
10. Develop Positive Client Relationships
The very first thing you can do to increase your account receivable is to cultivate positive connections with your current clients. If you can keep customers satisfied, you may avoid an unexpected delay in payments and your cash flow will be unaffected for a longer period of time.
When it comes to debt recovery, small gestures like an email check-in and a nice phone call may make a big impact. Having a solid relationship with your clients will help you get paid faster.
Customers that are pleased with the goods and services they have purchased pay on promptly. Small and medium-sized companies (SMBs) might benefit from professional, courteous follow-up actions such as an email or phone call.
Why Is Accounts Receivable Turnover Important?
Accounts Receivable Turnover is important and it can be useful to implement the above tips for companies to increase its Accounts Receivable Turnover due to following reasons:
- Tracking the accounts receivable turnover reveals how quickly the organization converts its receivables into cash on average.
- Finance teams may use AR turnover ratio to make balance sheet projections since it offers a broad estimate of when receivables will be paid.
- This enables businesses to estimate how much cash they will have on hand in order to better manage their spending.
- The higher the AR turnover ratio, the more cash your company has to meet bills and pay off obligations.
- The low AR turnover ratio is a sign that you need to improve your credit control methods, financial dependability of your consumer base.
There are many more benefits than the ones described above which can be taken advantage of once you know your company's accounts receivable turnover.
There are several techniques that organizations may use to enhance the company's account receivables turnover, ranging from implementing cloud-based technologies to optimizing billing and credit-based rules. But first, you must identify the regions responsible for the company's weak cash flow. Once you've discovered the problematic region, the remainder should be simple to solve if you already have a solution. The above solutions are relevant to any company vertical with a large client base.
Increasing your accounts receivable turnover can help your firm function more smoothly and allow you to be paid more quickly.
A good cloud accounting management system can be a great investment for your company. We recommend you to try ZaMoney - an advanced accounting and bookkeeping software. ZarMoney has highly useful features that will boost your organization's accounting management and help you manage your accounts receivables more efficiently.