As a business owner, enhancing your accounts receivable turnover should be a top priority. The revenue from selling your product or service on credit isn't truly realized until it's collected from clients. Efficient management of accounts receivable and timely collection of customer payments significantly improves your cash flow, which is a key indicator of long-term business success.
What is Accounts Receivable Turnover?
Accounts receivable turnover measures how effectively your business converts its accounts receivable into cash. The Accounts Receivable Turnover Ratio helps gauge the efficiency of extending credit to customers and collecting the money owed.
How to Calculate the Accounts Receivable Turnover Ratio
In this formula, Net Credit Sales represent your total credit sales for the accounting period (monthly, quarterly, annually), minus any customer returns and refunds.
To calculate your Average Accounts Receivable, add the accounts receivable amount at the beginning of the period to the amount at the end of the period, then divide the sum by two. Ensure the measurement period for both net credit sales and average accounts receivable is consistent.
Why is Your Accounts Receivable Turnover Important?
In general, a higher accounts receivable turnover ratio means your business has more cash available to cover expenses and service debts. Conversely, a low turnover could indicate that your business has:
Poor credit control policies,
An inconsistent approach to customer collections, or
A financially unstable client base
Reviewing your credit terms and accounts receivable process is crucial for safeguarding your company's financial health. With that in mind, here are 11 tips to help you improve your accounts receivable turnover.
11 Strategies to Enhance Your Accounts Receivable Turnover
1. Foster Strong Client Relationships
The first principle of managing accounts receivable is to build strong client relationships. Satisfied customers are typically more willing to pay for the goods or services you provide. Whether you are a small business or a growing corporation, small gestures like friendly phone calls or email check-ins with your customers can significantly impact timely payment collections.
2. Invoice Accurately, Promptly, and Frequently
An accurate, detailed bill is the easiest for your customers to pay! Equally important is to invoice on time and frequently. Companies that invoice late risk setting a precedent for accepting late payments.
Avoid the mistake of waiting until outstanding amounts accumulate before invoicing your customers. Billing for services or products supplied more than a month ago increases the likelihood that customers will have mentally moved on. Smaller, regular bills are also less daunting for customers to pay than a large quarterly invoice.
3. Specify Payment Terms
Ensure the success of your accounts receivable by including clear payment terms on your invoices. Request payment within Net 30 days and don't hesitate to include late payment charges.
Late payment fees are typically a percentage of the original invoice amount. If you sell high-value products or services, it may be prudent to set credit limits or offer payment plans.
4. Reduce Payment Terms
Another approach is to shorten your payment terms to reduce the payment window. However, it's crucial to align your payment terms with industry standards. For instance, if the norm in your industry is Net 60 but you opt for Net 30, you might risk losing business, particularly if the purchase value is high or your customers are sensitive to cash flow.
5. Offer Incentives for Early Payment
While providing incentives for early payment may involve a cost, the cash inflow and time saved on collections could offset the expense of the discount.
You can establish your payment terms as 1% 10 Net 30, offering customers a 1% discount if payment is made within 10 days of the invoice date. Customers seeking cost savings may be motivated to take advantage of this discount, thereby increasing your cash inflow within a short period.
6. Utilize Cloud-Based Software
Cloud-based accounting software simplifies your billing and accounts receivable procedures. Operating in the cloud enables you to access your financial data from any location and collaborate with your bookkeeping team instantly.
Bluemount Backoffice Solutions prefers utilizing Xero and QuickBooks Online when working with small to midsize business clients due to their user-friendly interface and extensive functionality.
Xero and QuickBooks Online both provide seamless integration with your time tracking software, enabling you to include time entries in your company invoices. Additionally, their compatibility with programs like Expensify and Dext Prepare allows you to incorporate incurred expenses into your invoices effortlessly.
Xero and QuickBooks Online integrate with various analytics tools to assist you in monitoring cash flow. These cloud-based accounting software solutions also streamline the process of automatically generating recurring invoices and sending follow-up reminders to customers.
7. Simplify Invoice Payments
Offering various payment options for your invoices simplifies the adoption of the preferred accounts payable method by your customers' accounting departments. This increases the likelihood of timely invoice payments.
However, the era of exclusively accepting checks or wire transfers for payments has passed. Nowadays, most companies also accommodate EFTs (electronic funds transfers) and credit card payments.
Bluemount Backoffice Solutions utilizes Plooto to facilitate fast payment sending and receiving through checks or bank transfers, while services like Square streamline bill payments for your clients via credit card. Although these services entail commission fees, the convenience of accepting online payments and receiving funds sooner can justify the expense.
8. Eliminate the Need for an Accounts Receivable Department
The most effective approach to handling accounts receivable is eliminating them altogether! While this might not be suitable for every service-based business, many companies can opt for pre-payments before delivering their product or service. Utilizing pre-authorized online payment platforms like Rotessa enables automatic withdrawal of payment from your client's bank account, eliminating the need for collections calls and reducing the risk of losses from non-payment. Although it may take 3–5 business days to receive payment, such platforms often result in long-term savings and efficiency gains.
9. Streamline Your Billing Structure
Numerous service businesses have minimized accounts receivable complexities by shifting to fixed-fee billing. By entering a service contract with your customer, you provide consistent monthly services at a predetermined price. This approach significantly mitigates the anxiety often associated with receiving unexpectedly high invoices.
Fixed fee billing arrangements also simplify the process of using pre-authorized debit to withdraw payments directly from your customers' accounts every month. This approach strikes an effective balance between providing your customers with clarity in billing and ensuring you receive regular, timely payments.
10. Maintain Regular Follow-Ups
No one enjoys making collection calls. That's why it's essential to implement our tips for enhancing your accounts receivable turnover, ultimately minimizing the necessity for such calls altogether!
You can simplify your collection process by instituting a policy of consistently furnishing detailed, precise invoices with clear payment terms from the outset. Nonetheless, errors can occur, and occasionally, a missed payment is simply an oversight where the client would welcome a gentle reminder.
At Bluemount Backoffice Solutions, our collection process entails sending a courtesy reminder ten days before an invoice is due, followed by immediate follow-up once the due date has passed.
11. Conduct Regular Reconciliations
The more often you reconcile your accounting records, the more current your accounts receivable will be. How do these two aspects relate to each other?
Upon receiving payments from credit customers, promptly reconcile them with outstanding invoices and remove them from your receivables list. This practice keeps your accounts receivable balance up-to-date and simplifies turnover tracking. At Bluemount Backoffice Solutions, we advocate for regular bank reconciliations precisely for this purpose.
Keep in mind that managing, monitoring, and enhancing accounts receivable turnover is crucial for maintaining healthy cash flow. By tracking your turnover, you can identify trends in your accounts receivable practices and assess their impact on your company's profitability.
Our Process for Selecting and Assessing Recommended Software
We conduct comprehensive research and testing on the apps incorporated into our routine workflow for client bookkeeping services. Initially, we establish criteria for evaluating the software and thoroughly examine the app. Subsequently, we test the app, identifying its strengths and weaknesses. We then integrate the app into our workflow for at least a few weeks before determining whether to recommend it to our readers. Throughout this process, we utilize the software for its intended tasks. For a detailed overview of our software selection and evaluation process, please refer to the specifics outlined in our methodology.
Bluemount Backoffice Solutions does not receive any form of consideration or compensation from software publishers for featuring their software in our blog articles.