Improving accounts receivable turnover should always be a priority concern for small business owners. Reason being that the money generated from selling a product or service on credit cannot be viewed as revenue unless it is collected from the clients. Therefore, the more efficient the accounts receivable management and payments from clients, the smoother the cash flow will be, which is also the best long-term sustainability indicator.
What is meant my accounts receivable turnover ratio?
The accounts receivable turnover ratio tells the number of times the accounts receivables have been collected during a specific accounting period. This ratio can be used to decide whether a company is facing challenges collecting sales that were made on credit. The greater is the turnover, the quicker the rate of collecting receivables. It is expressed in many forms like accounts receivable turnover ratio, accounts receivable turnover in days, and more.
What does account receivable turnover means?
The accounts receivable turnover determines the efficiency of a company with respect to asset usage. Therefore, it is a crucial indicator of a firm’s financial and operational functioning. A high accounts receivable turnover denotes that the business operations are efficient. However, a declining accounts receivable turnover tells that there is a collection problem with the customer.
Reasons why your accounts receivable turnover ratio is important
Along with evaluating the possibility and the pace of the payments you are expecting, the turnover ratio also determines the efficiency of the credit policy and practices and managing customer debt.
A high ratio is a good sign for the company because:
- Receiving payments for debts increases cash flow.
- Customers paying off debt swiftly frees up credit lines for any future purchase.
- Extending credit to the right customer means fewer chances of bad debts.
- Collection methods are effective.
However, a low ratio denotes that there is a lot of room for improvements like:
- Collections policies may need to be updated.
- Customers are finding it challenging to clear payments, decreasing the chances of future purchases.
- Uncollected or bad debts are causing harm to the cash flow.
- You are exercising too much leniency in giving credit.
By keeping a check on accounts receivable, you can find opportunities to improve our business policies. It may sometimes pain to manage accounts receivable, but it is an essential part of managing business and keeping cash flow on the right track despite the challenges. So here are ten best practices that can help in improving the accounts receivables turnover resulting in profit maximization.
Ways you can increase your accounts receivable turnover
- Enhancing the billing efficiency:
Companies that practice manual processing spend only 20% of their time communicating with their client regarding payments. However, companies that utilize automation software spend 62% of their time communicating with their customer. Sending invoices to customers as quickly as possible is a smooth way to ensure payments get cleared without any hindrance. Therefore, the team should make efforts to make and send invoices just after the work gets completed. Also, make sure to discuss payment methods and other terms prior with the customers.
- Invoicing accurately and timely:
61% of late payments arise due to administrative issues like wrong invoices or late processing of invoices. Producing an accurate bill that is detailed can help businesses and their clients carry out the payment process in a smooth manner. But, the payments should be processed in a recurring and punctual cycle of billing in order to enhance the turnover ratio. In addition, processing invoices late can establish a harmful precedent that your business is fine with late payments.
- Rewarding payments that are efficient:
Small incentives to customers can go a long way. Perks like discounts, free shipping or delivery, and prizes for early payments can help in encouraging customers to clear their dues quickly. You can also provide coupons or passes to promote future purchases. With a consistent flow of payments, you can easily qualify your target turnover ratio, enhance cash flow and make your business more successful.
- Using Cloud-based Software:
67% of accountants recommend taking assistance of a cloud accounting software. Such software helps to smoothen the billing and accounts receivable processes by providing greater financial data and collaborating effectively with the accounting team. Xero and QuickBooks are two examples of such tools that are excellent for businesses of small to medium level because they have more features that are easy to use. These tools also integrate with other time tracking software that helps in logging time entries in the invoices. In addition, the ability to connect with certain analytics tools allows efficient tracking of cash flow. Many firms offer accounts receivable services that make use of up-to-date software to make your accounts receivable process more efficient. You can hand over your complete accounts receivable function to them and concentrate your time on core operating activities.
- Building strong customer relationships:
For an organization, the benefits of having a close relationship with the clients are numerous. By enhancing connections with a customer, the accounts receivable processes can improve exceedingly. In addition, it is more likely for a satisfied customer to pay on time and contribute to the improvement of the turnover ratio. Therefore, in order to build a greater connection with your customer, regularly keep in touch with them via calls, emails, or other mediums.
- Easing the payment process:
Diversifying the number of methods through which your client can pay makes the payment process significantly easy. Simpler payments allow fast processing by reducing the customer’s accounting teams’ work. In addition, in today’s environment, one cannot thrive by only accepting cheques and wire transfers for payments. By adopting methods like electronic funds transfer and credit card payments, the payment process can be sped up considerably. Tools like Plooto and Square make the payment receiving process via cheque, wire transfer, and credit card comparatively easy. In exchange for a small commission fee, one can get many benefits that can significantly increase the turnover ratio.
- Diversifying the client base:
Getting contracts from big corporations is a massive achievement for small companies. However, small companies should be careful before they desert their services to some other client because of this contract. Large corporations extend payments to at max 120 days which can be a long time for small companies to operate without payments. For this reason, it is vital to diversify the client base in order to maintain a healthy cash flow. So keep working hard to bag a few large clients. However, it is also essential to stay on the ground by continuing to provide services to smaller clients to receive payments in a short period. Maintain a healthy balance of client size to keep your accounts receivables in sound condition.
8. Taking initial deposits or progress bill:
Set deposit amount, or determine a percentage of the total that the clients must pay prior to the commencement of work or at certain stages of the job. Still, if you’re facing issues with your debtors, implement new policies and ask for complete payment in advance.
9. Including payment terms:
Make your accounts receivables smooth by introducing clear payment terms on the invoices themselves. Request your clients to make payment within 30 days, and don’t hesitate to include late payment charges. Late payment fees can be a specific percentage of the original invoice amount. In addition, if you are selling luxurious or costly products or offering exclusive services, it would be better to set a credit limit or provide a payment plan.
10. Using a payment reminder system:
Purchase a CRM system that can keep track of unpaid accounts and send reminders automatically. However, if this isn’t possible, assign the duty to one of your staff members to send reminders or make phone calls for payments receivables.
Improving your accounts receivable turnover can help your business operate in a more efficient manner, and payments are also received at a faster rate. To accomplish this, the most efficient way can be through accounts receivables automation or accounts receivables services.These methods can effectively help generate and deliver the invoices to the customer quickly, which will allow fast payments from the clients.