When you find yourself short on cash and sales aren’t to blame, the next stop is generally your accounts receivable turnover.
According to AccountingTools, “accounts receivable turnover is the number of times per year that a business collects its average accounts receivable. The ratio is intended to evaluate the ability of a company to efficiently issue credit to its customers and collect funds from them in a timely manner. A high turnover ratio indicates a combination of a conservative credit policy and an aggressive collections department, as well as a number of high-quality customers. A low turnover ratio represents an opportunity to collect excessively old accounts receivable that are unnecessarily tying up working capital.”
Managing accounts receivable is one of the greatest challenges to any business, let alone managing the turnover. But despite it’s difficulty, it’s a vital part of keeping cash flow headed in the right direction.
WHERE DO YOU STAND?
In order to assess your accounts receivable turnover and know where you stand, you first must know how quickly you’re collecting your total balance of accounts receivable in any given period. This can be determined using a convenient calculation. Simply divide the net value of credit sales during a given period by the average accounts receivable during the same period.
SHORT ON CASH AND SALES AREN’T TO BLAME?
If you find yourself in this boat, you need to tighten up your turnover by making sure that when you sell a product you deliver it quickly and then get paid quickly as well. This will not happen without an efficient and well managed accounts receivable flow that starts with creating and sending invoices. Make sure you’re turning your invoices to cash.
IS IT YOUR DAILY SALES OUTSTANDING (DSO)?
If your cash flow and accounts receivable turnover is down, it’s time to look at your DSO. An important fact that often gets overlooked is that a sale is only a sale once it’s paid for. The problem that companies face is that their customers just aren’t paying in a timely manner. To combat this issue, tell your customer your expectations at the start of the sale and follow through promptly from the day the account is due until it is paid. Keep in mind, the quicker you can recover your receivables, the faster you can cultivate it in the pursuit of additional profits.
DO YOU HAVE A PLAN?
Having a plan with treatment strategies for different risk levels will create consistency and remove guesswork. Providing standard templates for written communication and scripts for person-to-person contact is a valuable tool in your Cash Flow Recovery System. This kind of preparation will make your collection efforts more effective and less stressful.
Please visit Dynamic Legal Recovery’s website or call us at 858-348-1780 for your complimentary evaluation.
