How can you use the accounts receivable turnover ratio to assess your collections process?

? The accounts receivable turnover ratio is an accounting measure used to quantify how efficiently a company is in collecting receivables from its clients. ? A high ratio may indicate that corporate collection practices are efficient with quality customers who pay their debts quickly. ? A low ratio could be the result of inefficient collection processes, inadequate credit policies, or customers who are not financially viable or creditworthy. The ratio tells a company: ? How well a company is collecting credit sales. ? What collateral opportunities a company may have. ? How sufficiently a company is evaluating the credit of clients. ? How it is performing over time. ? How it is performing compared to its competitors.

In a time where interest rates are rising, you want to be turning over your receivables. This is working capital that could be used elsewhere in your business. Improving collections can be done by doing credit checks before approving the sale and following up regularly when the receivable is past due. You are not trying to be annoying antagonist, but you have a right to receive the money in accordance with the sales contract or agreement. Likewise, you want to stretch out your payables to hold onto the cash in your business in accordance with your agreement with the vendor.

In financial analysis, benchmarking is crucial. Compare your accounts receivable turnover ratio to industry benchmarks and your company's historical data. This analysis gauges the effectiveness of your collections process compared to industry peers, identifying areas for improvement. Focus on receivables past due, measuring the percentage that exceeds the payment period. This assesses the timeliness and efficiency of your collections. A detailed examination reveals insights into potential bottlenecks, guiding strategic refinements in your receivables management.

Diligent systematic process to pursue receivables is paramount. You need someone to take on the role of dedicated debtors clerk which may just be an important part of someone’s role, a part time position or full time. Give them the right tools eg. Chaser and sales managers and management must support them in their role. Debtors need to be chased weekly.

In today's financial climate you should not let Accounts Receivable go beyond 30 days. Sometimes it as simple as they did not get the invoice in the mail or you have not received the payment due to mail delays. Do not let these simple problems to solve delay your receipt of funds due you. I used to make these requests by email, however, today I would make a telephone call. Whatever your customers problem is, you want to begin on solving it immediately. Be cordial. Be helpful. Establish a repayment plan quickly.

With Accounts Receivable you have to be reviewing weekly. Collecting within the first 30 days. Find the issue asap and resolve the issue. Offering payment options, correcting the issue with non payment. I find in working with small business owners they fail to review their accounts receivable weekly. Then not taking action. Everyday you don't collect you lose money. Then companies getting into debt and increased accounting labor by selling their invoices at triple interest rates. I have watched this so many times. No cash flow. Or the cash flow stops.