How to Calculate Accounts Receivable Turnover

If you are running a business with sales as its prime objective, you must ensure that transactions happen smoothly. Various factors lead to the growth of the company. One of the most important yardsticks to check the revenue your company is receiving from the customers is the Accounts receivable turnover. It determines how effectively you are providing credit to the customers while simultaneously collecting the payments from them on time. Though sometimes, it becomes difficult to keep track of the transactions, if you keep track of the Accounts receivable turnover, you will be able to determine the company’s financial efficiency.

How to Calculate Accounts Receivable Turnover

Reasons to Determine the Accounts Receivable Ratio

The Accounts receivable ratio turnover provides you with a clear image of the business’s financial condition. It shows you how effectively your company is progressing. It also provides a clear picture of the payments your company is receiving from the customers. Therefore, the accounts receivable services are helpful for the following reasons:

1. Forecasting Cash Flow:

The Accounts receivable turnover shows you the cash inflow into your business from the customers. If you are selling goods to customers on credit, you must also ensure that you get timely payment from customers, which will help keep the company financially stable.

2. Ineffective Billing:

If you are not getting a timely payment from the customers, it is the responsibility of your billing department. You must ensure that the billing department also keeps track of the customers who falter the payments.

3. Reviewing Credit Policy:

If you find that your company is providing credit to the customers quickly, you must ensure to pull back your policy. A practical and strict credit policy can keep wrong customers away from your business. Hence, it is best to identify potential customers first and then extend your credit policy to them.

Therefore, you should identify the wrong areas of your business, especially the credit policy, and ensure a smooth flow of transactions.

Ways to Improve the Financial Stability of Your Company

If you want to ensure your company’s financial effectiveness and efficiency, you must use the automated collection strategy. It helps in the timely collection of cash from customers. The following are the ways that will help to improve the efficiency of your business.

1. Invoicing at the Right Time:

You must make sure that you invoice your customers at the right time. If you make the invoice and send it to your customers late, it will increase the odds of late payment, and customers will get a chance to pay the amount beyond the schedule. However, if you have an automated tool, it will ensure to generate the invoices on time. It will also help the company to keep track of the sales daily.

2. Ease of Payment:

One of the most critical factors that help receive timely payments from customers is the ease of payment. If your company has various methods of payment processing, customers will be able to make the payments at their convenience. Moreover, they will also make the payments on time. Therefore, choosing various methods of payments ensures smooth in-flow of cash from the customers.

3. Smart and Smooth Workflow:

If you want to create an automated and intelligent workflow, you need to keep separate accounts of your customers. It will help you check each customer’s payment details and payment schedule. Hence, you will be able to keep track of the customers, and by making timely follow-ups with reminder emails, you will be able to lessen the late payments. Your customers also will be satisfied as they will have an error-free record of payments.

Calculating the Accounts Receivable Turnover

The Accounts receivable turnover ratio is the best way to analyze the overall economy of your company. Hence, whether you have a small or big business, you must make it a point to have an automated Accounts receivable turnover. If your turnover ratio is less, your collections have some issues. Your average collections are taking longer than the scheduled time. Hence, you can track your clients responsible for late payments. To calculate the Accounts Receivable turnover, consider your net sales and average gross receivables and divide the two. You can get the average gross receivable by adding the opening accounts and closing accounts receivable and then dividing the total by two. The accounts receivable turnover ratio will give you a clear picture of the current economy of your company. It will help you to take the necessary steps in streamlining the entire process of collections from your customers.

High and Low Accounting Ratio

A high accounting ratio proves that your company is growing strong. It shows that:

➨ You are receiving payments from the customers regularly. Hence, there is a smooth cash flow for your company.

➨ Your potential customers are paying off their dues timely, ensuring they can make future purchases.

➨ Your company’s liability is decreasing as there are fewer chances of bad debt.

➨ You have an effective and efficient collection method from the customers.

Conversely, a low accounting ratio is not suitable for your company. You must take immediate steps to restore your company, or else it will fall flat. A low accounting ratio occurs due to the following reasons:

➨ You do not have an adequate collection method. Hence, customers take advantage of making the payments according to their convenience.

➨ Since your company does not have various payment methods, it becomes difficult for the customers to make timely payments.

➨ If there is more bad debt in your company, it means there is less in-flow of cash.

➨ Your credit policy is readily available to customers.

Causes of Low Accounting Ratio

A low accounting ratio can downturn the economy of your company. If the customers make late payments, you will not have enough funds to pay your vendors. Hence, there will be a gap in the production process, which will negatively affect your company’s progress. Following are the causes of a low accounting ratio of your company:

➨ Your vendors will stop supplying you with the materials if they do not get the payment on time.

➨ Customers take it for granted in making late payments. Hence, there is a downward slope in the economy of your company.

➨ If your credit policy is not at par with the regular credit rules, the customers will not acknowledge them. Hence, invariably they will deliberately make late payments.

➨ If your customers are unsatisfied with the product or services, they will not make the payments on time. It may happen if a wrong product is delivered to a customer or the good is damaged. Hence, the customer service department has to ensure that the goods are delivered on time.

➨ Your customer service department is functioning correctly. If the customers are not satisfied with the products or your services, they will block the payment. Hence, you must ensure that the mistakes on your part are not frequent.

Ways to Improve the Accounts Receivable Ratio

If you want to improve your company’s economy, the foremost step is to improve the process of collections from the customers. You can do so by following the steps:

➨ Ensure to send the invoices to the customers on time.

➨ Do a regular follow-up once in thirty days. It will help you track the customers who are due for payment.

➨ Send timely reminders to your customers before the due date.

➨ Set proper credit policies.


See Also: How Can I Protect My Bank Account From Creditors


Conclusion

A high accounting turnover ensures that your company is going strong, and it also suggests that your payment receivable procedure is done in an organized way. However, if your company is not getting the payments from the customers on time, it signifies something wrong with your company. You need to set rules so that the company’s economy rises and the customers pay their dues on time. Hence, a good accounting turnover ratio is a must for your company’s smooth and efficient flow.