Account receivable services are very crucial for the businesses these days. The best solution for the proper maintenance of account receivable is accounts receivable management services. The expansion of a business is credited towards its customers upon the timely making of payments or else it would lead to bad debts. Thus it stands necessary that one should keep an eye on the parties who own the payment in the process of accounts receivable. This also shows the importance of tracking the payments and the efficiency of the company in the management of the accounts balance or else it will harm the company.
Importance of Outsourced Accounts Receivable Services
This stands for the financial ratio which indicates the collection made by a company towards the accounts receivable in a year and also provides for the effective management of the money owned towards its customers. The turnover ratio by the goods received stands out to be 7.8 or above as compared to the industry standards as a lower ratio would lead to the efficient management of the debts. The model for accounts receivable also can be used in the creation of financial models by which one can predict the revenue for the future market.
Even one can make for the generation of financial statements followed by balance sheets, thus the account receivable ratio stands out to be much different towards the assets turnover ratio that further measures for the ability of the company to turn the current assets into revenue over a certain period. Thus using them simultaneously would lead to the creation of inconsistencies in the process of accounting.
Calculation Process of Accounts Receivable Turnover
The formula which is used by the outsourced account receivable service providers in order to calculate the accounts receivable turnover ratio is given below in the box:
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Gross Credit Sales/Starting Accounts Receivable / Accounts Receivable Starting Balance+Accounts Receivable Ending Balance/2 = Accounts Receivables Turnover Ratio |
The ratio does not include the sales made from cash as it is not considered for the accounts receivable based on cash. The calculation made is required based on credit sales towards the turnover ratio.
Let’s say a business generated $200,000 for the gross credit sales under which the starting accounts receivable was $20,000 and ending receivable was $30,000 which can be calculated as follows:
($200,000 - $20,000) / (($20,000 + $30,000)/2) = 7.2
These examples show the turnover of the accounts receivable towards cash as 7.2 times a year which can also be used to understand the income of the business. The accounts receivable turnover ratio can be done through various other online calculators for more convenience.
How to Improve Accounts Receivable Turnover Ratio
One can further improve their accounts receivable turnover ratio with the help of outsourced accounts receivable services by following the methods which include:
To Enhance the Management of Invoices
This includes keeping a clean record of the finances for the proper calculation of the records or else wrong records would lead to false reporting and forecasting. Thus at the time of improving the ratio one is required to enhance the management of the invoice procedure. There are various modern methods for the management of invoices rather than keeping data under spreadsheets, one can use accounting or bookkeeping softwares to make sure that invoices are recorded accurately. This helps with the automation of processes and collection of the accurate data on finances.
Effective Credit Policies
One can keep the business consistent by implementing policies that can be useful upon the accepting and spending of money. The accounting team will also work progressively for the management of accounts and work efficiently. The policy should include the timeframe for the extension of the credit which can be 30, 60 and 90 days but shall stand the same.
The Use of Accounting Software
The manual process stands out to be more complex and time taking this one is required to adopt the process for automation with the best accounting softwares for the management of invoices and the implementation of other policies. Today AI is also taking over the manual efforts for the analyzing of data and improving the process for collection of data reducing errors and improving accuracy.
The Credit of the Customer
This stands out to be a credit towards the customers as most of the customers pay on time while others do not, thus it is very important to analyze the needs of the customers before offering the credit. This showcases the history of credits made by the customers who are habitual for late payments hence one can receive cash at the time of payment.
Risk Analysis on Credit Terms
If a customer has poor credit scores for the application one can adjust the terms for credit on risk as a person with a strong credit score with the application must be 100% qualified for short-term credit. Thus one can require the customer to be up to 50% towards the services and products provided this way one is not required to pay for the services in the long run and can make the payments based on risk.
Dispute Management Process
This includes the efficient management of risk on the turnover ratio as the dispute is likely to occur towards the company for the services provided thus requiring an efficient dispute redressal mechanism. One can establish authorities that are specifically focused on the dispute redressal mechanism and can also speed up the process for speedy justice. Thus one can settle the dispute by justice which would ultimately lead to a higher turnover financial ratio.
Management of Overdue Accounts
The customers might make late payments for the services and products thus one can speed up the process by motivating the customers towards the accounts passes by creating a payment plan towards the customers. One can also remind them of payment through calls or emails reminding them of the payments for the accounts thus by which one can make timely payments.
Awareness on Best Practices
This stands out to be the most crucial part as the team is required to be aware of the changing terms of practices towards the management of accounts and the other receivable turnover ratio over the actual management. The best compliance with the policies would ultimately lead to the efficient management of the accounts for the collection of money.
A Collaborative Approach
The account receivable policies stand out to be much more receivable for the best practice and by which the employees can get effective insights to further improve the process and enhance more productivity towards the management of the accounts receivable and accurate analysis.
Conclusion
The Accounts Receivable Turnover Ratio or we can say ARTR is a key metric in order to assess a company's efficiency in managing its credit sales and collections. By calculating this ratio, businesses can identify how well they are converting receivables into cash. A higher ratio suggests effective credit and collection policies, while a lower ratio may indicate the need for improved collection efforts or a review of credit policies. Regularly tracking this ratio helps businesses maintain healthy cash flow as well as optimize their working capital management.
