Once the Sales Team scores a deal, everyone thinks that it’s already time to celebrate. Granted, after a grueling negotiation process, there’s no harm in a bit of merrymaking. But really, the work does not end right then and there. Behind the scenes, after contract signings, the next step is for the Finance Team to collect client payments—this is where Accounts Receivable Management kicks in.
Whether for one-time payments or subscription contracts, Receivables Management is an essential part of accounting. After all, being on top of collections is key to healthy cash flow for small businesses to corporations alike.
Calculating Accounts Receivable Turnover
When talking about receivables, the turnover rate is the most common ratio to check. Basically, your Accounts Receivable Turnover refers to the number of days it takes to collect payments from customers. To calculate this business ratio, simply divide your net sales made on credit over your average amount of receivables. The result you get can range from a couple of days up to a few months. It really largely depends on your industry and product or service.
Accounts Receivable Turnover = Net Credit Sales / Average Accounts Receivable
Let’s look into grocery stores as an example. When we visit as customers, we pay upfront when purchasing. When this is the case, turnover rates should be low, probably even non-existent. This is simply because the products are paid the instant that they are sold.
However, say a large supermarket supplies clients with fresh goods on a regular basis. Think of restaurants, cafés, and neighborhood stores. In this B2B set up, customers are given a longer payment period. Orders are made on credit and paid afterward on a set schedule. In this instance, the supermarket’s turnover rate is longer, since clients take weeks or months to settle their payment.
To find out how your turnover rate fares against competition, turn into publicly listed companies in the same industry. Their financial statements and ratios should be publicly available for you to study. These will give you a concrete idea and even a target to set and achieve.
7 Tips to Shorten Accounts Receivable Turnover
Is your ratio longer than average? That’s okay. Business is all about constant improvement, and this article will help you with that. If you’ve identified your ratio to be in line with the industry, that means you’re doing a great job!
In any case, the next step for you is to look for ways to shorten your Accounts Receivable Turnover. Regardless of the industry, a quick turnover is always a positive business trait. Remember: the quicker you get paid, the more available cash you’ll have. As such, follow these 7 tips and get started shortening your turnover!
1. Send Invoices on Time
After every order, send your invoice as soon as possible—preferably on the same instant. Provide an invoice with every delivery or furnish it along with the contract. The premise for this is that swift invoices warrant comparably swift payments.
Since we’re on the topic of invoices, make sure to include your terms in the same document. This makes it easier for clients to remember your payment schedule and make arrangements accordingly.
2. Setup a Schedule and Stick to It
When talking about payment schedules, set it once, and follow it consistently. This means that if you’ve specified payment dates on your contract, follow it firmly when collecting from your customers. Having irregular dates will only make it seem like you’re okay with erratic payment schedules.
With that being said, keeping an open mind when dealing with special scenarios is also important—this pandemic is a great example of this. After all, taking good care of customer relationships is essential in business success.
3. Use a Reliable System for Tracking Accounts Receivables
Gone are the days when the only option for businesses is to use calendars to remind them of collection dates. With the current technological landscape, companies already have several ways to create efficient systems for receivable tracking.
Aside from digital calendars with reminder options, dedicated software like MPM Accounting provides a reliable way of monitoring. Learn more about its benefits here.
4. Offer Various Payment Methods
The best tip to shorten your Accounts Receivable Turnover is to simply make it easy for customers to pay. A good way to achieve this is by having several payment channels available. These may be through cash, checks, online banking, debit and credit cards, etc. Make the process as quick as possible and your customers will love paying in no time.
The only key factor to keep in mind with having various payment methods is security. For example, when you have a collection officer, accepting cash payments can be a huge risk for both your employee and your business. Monitoring countless channels can also be difficult if you are keeping a lean team. At the end of the day, make sure to carefully evaluate your options and select which ones benefit your company the most.
5. Follow up Regularly
Our fifth tip is straightforward yet gets the job done. A simple follow up can make a huge difference in getting timely payments from customers. After all, healthy client relationships revolve around proper communication.
This is another method where technology helps. Through email software, you can send an automated reminder a few days before the deadline, another email on the due date, and follow up days after. Talk about convenience, right?
6. Provide Installment Options
This next tip is applicable to clients who seem to be having a difficult time settling their dues in one go. By dividing payments into smaller chunks, you can collect portions of the bill in a quicker manner. Think of it this way: if your customer takes 4 weeks to pay, why not collect 1/4 of the payment every week instead?
This saves you time spent waiting, while also making it easier for your client to settle. Especially for seemingly uncollectible accounts, installment options might just be the way to turn the situation around.
7. Give Incentives for Early Payments
Let’s face it: everyone loves discounts! Remember the time you bought something simply because it’s on sale? Yes, that’s because discounts work. Just like you, we bet your customers love getting good deals too. Create an incentive for early payments and show your clients that they’re getting such a great deal at no cost!
Keep in mind that incentives are not limited to monetary discounts on purchases. Try giving out freebies, offer free trials, or shoulder delivery fees. The important thing is to make your customers feel like they’ll miss out if they refuse the deal.
Easy Process = Quick Payments
To summarize all these 7 tips, the best way to improve your Accounts Receivable Turnover is to make the payment process quick and simple for your customers. By being consistent in your strategy, we’re sure you’ll get a better turnover rate in no time.
[…] deposit it in the company’s account. To apply segregation of duties, have one person manage sales made on credit by issuing credit memos. Meanwhile, get another person to receive the payment once it’s […]