As a business owner, improving your accounts receivable turnover should be a priority. After all, the money you earn selling your product or service on credit can’t truly be counted as revenue until it’s been collected from clients. The better you are at managing your accounts receivable and gathering customer payments, the better your cash flow will be, which is one of the best indicators of long-term business success.
What is Accounts Receivable Turnover?
Accounts receivable turnover is a measure of how effective your business is at converting its accounts receivable into cash in the bank. You can gauge how efficiently you extend credit to customers and collect money owed by using the Accounts Receivable Turnover Ratio.
How to Calculate Accounts Receivable Turnover Ratio
In this formula, Net Credit Sales is equal to your total credit sales for the accounting period being measured (monthly, quarterly, annually), less any customer returns and refunds.
You can calculate your Average Accounts Receivable by adding your accounts receivable amount from the beginning of the period to your accounts receivable amount at the end of the period and dividing the result by two. The measurement period for your net credit sales and average accounts receivable should be the same.
Why Does Your Accounts Receivable Turnover Matter?
Generally speaking, the higher your accounts receivable turnover ratio is, the more cash your business will have available to pay its expenses and service its debts.
A low turnover, on the other hand, could be a warning that your business has:
- Poor credit control policies,
- A haphazard approach to customer collections, or
- A financially unreliable client base
Examining your credit terms and accounts receivable process is critical for protecting your company’s financial health. So with that in mind, here are 11 tips to help you improve accounts receivable turnover.
11 Tips To Improve Your Accounts Receivable Turnover
1. Build strong client relationships
The first rule of thumb with accounts receivable is to establish strong client relationships. Happy customers are usually happy to pay for the goods or services you’ve provided. Whether you’re a small business or a growing corporation, small gestures like a friendly phone or email check-in with your customers can make a big difference when it comes to collecting payments on time.
Best Practice Handbook for Accounts Receivable
Download our AR handbook to explore our best practices for invoicing, payments and collections, and improve your accounts receivable turnover.Download the Handbook
2. Invoice accurately, on time, and often
An accurate, detailed bill is the easiest kind of bill for your customers to pay! But it’s equally important that you bill on time, and bill often. Companies that invoice late risk setting a precedent for accepting late payments.
Don’t make the mistake of waiting until outstanding amounts are relatively high 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. It’s also less daunting for customers to pay smaller, regular bills than to pay one large quarterly invoice.
3. Include payment terms
Set your accounts receivable up for success by including clear payment terms on your invoices. Request payment within Net 30 days, and don’t be afraid to include late payment charges.
Late payment fees are usually a percentage of your original invoice amount. If you sell products or services of a higher dollar value, it may be wise to also set credit limits or offer payment plans.
4. Shorten payment terms
Alternatively, you can also shorten your payment terms to decrease the payment window. However, you should determine your payment terms based on your industry’s practices. For example, if your industry norm is net 60 but you’re offering net 30, you may lose out on business if the purchase value is high or your customers are cash flow sensitive.
5. Provide discounts for early payment
Incentivizing early payment might come at a cost but the cash inflow and time saved on collections could outweigh the cost of the discount.
You can set your payment terms to be 1% 10 Net 30, which entitles your customer to a 1% discount on the bill if payment is made by day 10 of invoice date. Customers looking to reduce cost might be more inclined to maximize this discount and boost your cash inflow in a short time span.
6. Use cloud-based software
Cloud-based accounting software makes your billing and accounts receivable process easier. Working in the cloud lets you access your financial data from anywhere and collaborate with your bookkeeping team in real-time.
Both Xero and QuickBooks Online offer easy integration with your time tracking software, which means you can include time entries in your company invoices. And because they work seamlessly with programs like Expensify and Dext Prepare, they also let you include incurred expenses on your invoices.
Xero and QuickBooks Online connect with a wide range of analytics tools to help you track cash flow. These cloud-based accounting software also make it easy for you to automatically generate recurring invoices and send follow-up reminders to customers.
7. Make paying invoices easy
By providing multiple ways for customers to pay your invoices, you make it easier for them to adopt the accounts payable method their accounting department prefers. And that means they’ll be far more likely to pay your invoices on time!
Gone are the days, however, when accepting only cheques or wire transfers for payment was good enough. Today, most companies accept EFTs (electronic funds transfers) and credit card payments as well.
At Enkel, we use Plooto to quickly send and receive payments via cheque or bank transfer – while programs like Square make it easier for your clients to pay their bill by credit card. Yes, there are commission fees attached to these services, but the convenience of accepting online payments and receiving your payments earlier can make them a worthwhile expense.
8. Do away with having an accounts receivable
The best method for managing accounts receivable is saying goodbye to them entirely! This may not be a viable solution for every service-based business, but many companies have the option of accepting pre-payments before providing their product or service.By using pre-authorized online payment platforms like Rotessa, you can automatically withdraw payment from your client’s bank account – removing the need for collections calls, while reducing potential losses from client non-payments. It can take 3–5 business days to get your payment but they often save money and effort over the long run.
9. Simplify your billing structure
Many service businesses have cut down on accounts receivable headaches by transitioning to fixed-fee billing. When you sign a service contract with your customer, you essentially offer the same monthly services at a fixed price. And that can go a long way toward reducing the panic that often occurs when a client receives a higher invoice than expected.
Fixed fee billing arrangements also make it easier for you to use pre-authorized debit to withdraw payments directly from your customers’ accounts every month. As a result, fixed-fee billing strikes an effective balance between providing your customers with billing clarity - and ensuring you receive regular payments on time.
10. Follow up regularly
Nobody loves making collections calls. Which is all the more reason to follow our tips for improving your accounts receivable turnover, and reduce the need to make them at all!
You can streamline your collection process by making it a policy to always provide detailed, accurate invoices and clear payment terms upfront. Mistakes do happen, however. And sometimes a missed payment is just that - an honest mistake where the client will appreciate a friendly reminder.
At Enkel, our collection process includes both a courtesy reminder sent 10 days before an invoice is due, and immediate follow-up once that due date has passed.
11. Reconcile frequently
The more frequently you reconcile your accounting records, the more up-to-date your accounts receivable will be. How are the two connected?
As soon as you receive payments from credit customers, they should be reconciled to outstanding invoices and cleared off your receivables list. That keeps your accounts receivable balance current, and makes it easier to track turnover. At Enkel, we believe in frequent bank reconciliations for just this reason.
Remember, taking steps to manage, monitor, and improve accounts receivable turnover is key for healthier cash flow. Not only will tracking your turnover help you spot trends in your accounts receivable practices, you can use that information to gauge the impact of your practices on your company’s profitability.