A Quick Guide to Accounts Receivable Turnover

What is Accounts Receivable Turnover?

The term accounts receivable turnover ratio is in general used to describe the performance of certain companies on a quantified basis with their management of the credit. The credit is usually extended to the existing clients by evaluating all the required details on how long would it take to retrieve the same payment within the accounting period.

Suppose an instance where a company that supplies fish bait at the docks, invoices each of the stores every 30 days. Here in this the payment terms counted for each customer would be net30 which says that they have thirty days for the payment from the date of invoice generation. Although you might receive the payments from some customers on time, there are latecomers as well. In fact, few might not pay them at all.

Now let’s compare it with another instance where a cable TV company provides relatable services to the consumers in the neighborhood. All the customers are billed every 30 days as well, but this time it is done at the beginning of the month of service delivery. This way no customer can delay or skip the payment since they will be missing the entertainment they have for the whole months. Here the accounts receivable which are different from the accounts payable turnover managed quite well.

In both situations, you can see how the ratio tells us the vast difference it has, providing us the important information of the customer payment behavior. This information will help you to gain the financial stability you have wanted from ever and your company could capitalize on the well-managed cash-flow. 

The organizations that focus on the accounts receivable are somehow extending their interest-free loans to all the existing customers since accounts receivable is money that you owe to others with the absence of any kind of interest. If an organization putting forward a sale to a client, the extension could be made for 30 or 60 days which tells you that the customer has 30 or 60 days to do the required payment for the product or services they have taken. This ratio of accounts receivable will make you aware of the efficiency a company has in its collection of their receivables or the pending credits which was put on an extension by its customers.

Apart from this, the turnover ratio also tells you about the times a company’s receivables are turned to have in cash over time. The company’s receivable ratio can be calculated on a timely basis from an annual, quarter, or month basis. However, it gets very important that a company’s receivables ratio are being kept on track so that one could read all trends or patterns it went through overtime. An organization could also watch over and correlate the collection of receivables to earnings to evaluate the impact a company’s credit practice has over the entire profitability.

How to find Accounts Receivable Turnover?

The term accounts receivables turnover will tell you about a company or organization and its practices to use its assets. The receivables turnover ratio is a figure of accounting method which is put into implementation on how brilliantly a company extends credits and collects the pending debts on a similar credit. If you are looking to calculate your company’s accounts receivable days turnover then follow a simple formula where you have to divide the net value of credits sales during the mentioned period by the average accounts receivable during the same mentioned period. The average for your accounts receivables can easily be calculated by adding up the value of accounts receivables you have at the initial stage and once the accounting period reaches its final stage and then dividing it by two. To improve collection management you can use ar automation software that can be integrated with accounting and ERP software of your business.

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How to Improve Accounts Receivable Turnover Ratio?

Most of the business owners make sure to keep their priority set on their accounts department and how is the overall receivable turnover coming out to be. We all know how important it is to do more sales or provide exceptional customer service but you need to focus on the backbone of the business as well, and that is a steady cash-flow. In this section, we will be talking about our top picks of the best tips which will ensure that there is an improvement in your accounts receivable turnover ratio and to cut down the collections call along with focusing on an improved cash flow:

1. Keep your invoice error-less and without any delay

If you focus on providing accuracy in your invoices and collection letters where all the details are mentioned exclusively then your clients would be more than satisfied while paying their bills. Now receiving the bill on time is also pretty important since it will help the organization you are a part of to collect all the pending receivables quickly. If you have a payment set up for the sales, it will cause less trouble for your customers to do the payment whether the bill is smaller or regular or even a larger bill every quarter.

2. Focus on professional relationship

It is important to have good customers with your current or potential customers to receive the payment on time. Happy customers would love to return to you for more purchases and you can have benefited from several happy clients regardless of the size of your company or business. Do not take your customer for granted and make sure they are going home happy after every visit to you.

3. Bring payment terms

Keep the payment terms on your generated invoices pretty clear to make sure that to be a success. The invoice should have clear written statements of payment say within 30 or 60 days from the date of generation. Also include the late payment fee which you would charge which will be a smaller percentage of the original invoice. To learn more about accounts receivable solutions please feel free to contact team Troveworks.