The accounts receivable turnover ratio is the measure calculated in accounting and is defined as the rate at which a company will collect cash from its customers. In simple words, it simply explains how many times accounts receivable have been converted into cash within a specified time. It boasts a very high ratio that may prove to be a good indicator that the company collects debts fast. Such a low turnover ratio might imply that the company ought to see a better way of credit collection. If such a ratio is well followed, U.S. businesses would ensure that there is good cash flow and financial stability. The business concerns would thus know how to calculate as well find ways of developing their accounts receivable turnover ratio, hence making the concerns even better performers and reducing risks associated with debts related to bad debts.

How to Compute Accounts Receivable Turnover Ratio

The simple yet very potent formula for computing the Accounts Receivable Turnover Ratio is as follows:

 Formula:

Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable. 

Steps for Calculation

• Determine Net Credit Sales: This shall include only the sales that have been done through credits and cash sales are not included.
• Average Accounts Receivable: This can be calculated by adding the beginning and ending accounts receivable for that period and then dividing it by two.
• Now, put in the Formula: net credit sales divided by average accounts receivable.

Example of Computation:

If the net credit sales of a business are $500,000 and its average accounts receivable are $100,000, then the Accounts Receivable Turnover Ratio is:

500,000 / 100,000 = 5.

It shows how many times in a year a business retrieves its receivables.

Why Accounts Receivable Turnover Ratio Is Important

The accounts receivable turnover ratio is important for a company to know the financial position of the company. Know why it is so.

• Cash Flow Health: More turns will mean the company is converting its receivables into cash with speed. Its cash flows will be healthy for this reason. It will state whether its credit and collection policies are functioning or not.
• Operational Efficiency.
• Credit Risk Management: This ratio will allow you to know what type of credit risk can be manufactured and how that can be enhanced for your collection procedures.

How to Improve Accounts Receivable Turnover Ratio

Apply the techniques discussed above and now your Accounts Receivable Turnover Ratio will also be developed. Thus, its development will enhance the overall financial health of your company.

• Offer Early Payment Discount: Offer incentives for early payments by your clients.
• Automation Invoices and Billing: Accounts Receivable Services that are well equipped with automated systems will speed up the process of invoicing and collections so that delay in receipt of payments is prevented.
• Reminder on Overdue Accounts: The Accounts Receivable Service should have a routine of prompt reminders of overdue accounts. Even when the accounts are not paid even after such reminders, the services of collection agencies can even be sought.
• Customer Credit Check: Before any type of credit is offered to new and even existing customers, a credit check should be made on them so that no bad debt is incurred.
• Improving Collectibility Terms: Improving the collectibility terms through cash flows and direction in business operations.

Accounts Receivable Turnover

To have a better accounts receivable turnover ratio, there are many strategic plays that an organization must consider the following:

It follows the collections of overdue accounts and reveals a customer who pays slowly and helps in providing the solution on time.

• Set clear terms of payment: Decide your payback. Through this, you minimize the possibilities of miscommunication or delay.
• Limit credit of poor paying customers: Limit credits or impose stricter terms with a few customers that have a poor paying history.
• Outsource accounts receivable management: The third-party provider can further enhance the efficiency of your collection process while saving valuable in-house resources.
• Streamline Invoicing: The invoices should be issued in time, and your in-house processes should also be aligned correspondingly for quick collection.

Benefits of Accounts Receivable Outsourcing

The accounts receivable outsourcing services will benefit the business at multiple levels; among them are;

• Saves Time: Your in-house resources would then be used for more productive services other than the work of collection.
• Higher Collection: Trained collectors can increase your collection rates, thereby enhancing cash inflows.
• Leverage the latest technology: A third-party accounts receivable service provider is, in general, using very modern software that cuts the invoice processing and payment process significantly.

Accounts receivable turnover is the most important ratio that indicates good management of the company's receivables. Periodic calculation and improvement will enable companies to maximize cash flow, reduce their credit risks, and consequently improve their financial performance; such improvements include credit policy tightening, automated invoicing, accounts receivable services, and so forth. Fino Partners specializes in helping companies fluidize their collections, thus optimizing their cash flow. We can begin optimizing your accounts receivable today to grow your business.