Accounts receivable turnover is a financial problem that many small businesses run into because owners often extend credit to clients, leading to a delay in payment. Accounting Tools defines accounts receivable turnover as the number of times per year that a business collects its average accounts receivable. Increasing your A/R turnover rate can be a huge obstacle but if you can accomplish it your company will operate more efficiently due to a smoother cash flow. Below we've listed 5 ways to increase your accounts receivable turnover (ART) ratio.
1. Collections Efficiency
This one is no secret, it makes sense that if you can find a way to make it easier for you to collect on what is owed, your ART ratio will increase. The best way to achieve this is to make it as easy as possible for your customer to pay on time. Some ways you can achieve this is by implementing a lockbox service, pre-authorized checks, utilizing an automatic clearinghouse, or purchasing a cloud-based A/R management solution. First, with a lockbox, customers will have a universal location where they can drop off their payments. Second, pre-authorized checks allow your business to draw payments from customer accounts regularly. Third, an automatic clearinghouse transfers funds from your customer to your business electronically. Finally, purchasing a cloud-based accounts receivable solution makes it easier for you to track all of this activity from anywhere and at any time.
Incentives can be a useful strategy to use when trying to increase your accounts receivable turnover ratio. Give your customers an incentive to pay their bill early. These incentives don't have to be overly costly -- you could give them small discounts, free shipping or delivery, and small gifts. These incentives would most likely be enough to motivate the majority of your customers to pay you sooner. Incentives increase the likelihood of your customers paying you, which results in higher accounts receivable turnover, better cash flow, and a more efficient business.
Communication is always important in any business relationship, especially with your current customers. After you send your customer an invoice, follow up with a phone call. During the phone call ask them if they have received the invoice and if they have any questions or concerns. Contact them again a week before the due date, if they haven't paid, to ask them when you can expect payment. Also, make sure that you record all communications customers and make sure that they know that they are being recorded. Recording communications will make it easier for you to go back and solve any issues and answer any questions you might have missed. Communication will help you get paid sooner and increase your relationship with your customers.
4. Automate and Streamline
According to Paystream Advisors, companies who use traditional collection techniques spend 15% of their time preparing for calls and another 15% prioritizing. In total, that is 30% of your time being spent on activities other than soliciting customers for payment. However, if you automate your A/R process, you spend only 12% of your total time on those activities. With an automated A/R solution you will also enjoy 10-20 percent in DSO, 25% in past due receivables, and 15-25% in bad debt reserves.
Think about your current credit terms, it might be time to change them. Revising your credit terms may include reducing the time frame a customer has to pay a bill, sending invoices out as soon as possible, and monitoring your Accounts Receivable Turnover ratio on a consistent basis. Furthermore, look into industry averages. It's possible that the reason why you are having a hard time collecting what is owed to you is due to not understanding how your industry normally collects.
Increasing your accounts receivable turnover will help your business run more efficiently and you can enjoy getting paid faster. There is a noticeable shift toward utilizing cloud-based accounts receivable solutions, especially ones that help automate your process. Increase your turnover rate and save time.
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