Accounts receivable management is at the core of your ability to operate continuously, even though it’s on the back end of business management. Sales are visible and at the forefront of reporting and key performance indicators (KPIs), but if you don’t realize the proceeds from transactions, your business could be at risk. By tracking accounts receivable turnover ratio as a key KPI, you’ll always know where you stand and when it’s time to sound the alarms to avert a cash crisis.
Why Track Accounts Receivable Turnover?
As you know, the accounts receivable (AR) turnover ratio measures how many times in the year customers pay invoices due. The higher the ratio, the better your finance team is at bringing in money your business is owed. It’s a simple calculation of net credit sales in the tracking period divided by average AR. Average accounts receivable is the AR balance at the start of the period plus AR at the end of the period divided by two. This calculation is easy enough to crunch on a handheld calculator or Google search bar, so there’s no excuse not to track this critical KPI—yet lots of reasons to do so.
Tracking AR turnover lets you assess:
- Viability of your credit policies.
- Efficacy of customer screening guidelines.
- Timeliness of invoicing.
- Effectiveness of dunning process.
- Write-off of your prevention efforts
By monitoring this vital KPI, you can shed light on the flaws and opportunities in your accounting procedures, but also in your sales and customer-vetting methodology. A high AR turnover ratio means your cash flow is healthy, but a very high turnover could expose overly aggressive collections techniques that might turn off your customers and limit sales potential.
With a middling or low AR turnover ratio, you may automatically assume that the accounting function is to blame. That’s not always the case. The cause could be aggressive sales strategies and a lack of proper customer vetting, for example a group of high-risk clients that aren’t paying as they should. That’s another reason to increase the visibility of this KPI beyond finance and upper management.
AR Turnover Issues Can be Native
Examining the accounts receivable turnover ratio can illuminate challenges and opportunities across the company. While AR and accounting teams track the performance of this all-important data, they should not bear the weight alone. If your AR turnover ratio is problematic, digging up the root cause is crucial. Late invoicing or inadequate dunning processes may be to blame.
However, there may be other factors at work that streamlining invoicing and collection methods won’t address. By highlighting AR turnover and exploring causation on a company-wide basis, you may expose native flaws contributing to slower collections. These can tie back to sales, client onboarding, poor communication, or faulty policies outside the finance department.
Benefits of Tracking Accounts Receivable Turnover Ratio
Tracking the AR turnover KPI, alone, isn’t ’ enough; you should also be analyzing underlying issues and creating actionable strategies from the data so you can achieve targeted benefits, including:
- Enhanced cash flow.
- Lower utilization of lines of credit.
- Greater customer satisfaction.
- Improved accounting team morale.
- Reduced write-offs and bad debt.
- Less time/cost for debt collection.
- Stronger credit policies.
Businesses of All Sizes Need AR Insight
No matter the size, niche, or sales volume of your business, if you offer credit terms to your clients, you have accounts receivable. That means you need insight into what drives your turnover ratio. How effective are your collections processes? How adept are your accounting and AR team at getting customers to pay on time? These factors determine your ability to expand your business, avoid incurring excessive debt, and stay cash-flow positive.
However, AR turnover is not just an accounting issue, and awareness of this KPI should not be limited to the back end of your business. Accounts receivables management should be an area of constant assessment and analysis, but can be time-consuming as a manual process.
If you’re ready to accelerate collections and leverage the power of data to improve your AR workflow, contact YayPay for a free demo today.