Increase Your Accounts Receivable Ratio
An Accounts Receivable Turnover Ratio is found by dividing the net annual credit sales by the average accounts receivables (Net Annual Credit Sales / Average Accounts Receivables). A high accounts receivable turnover ratio means that a company is efficient at collecting payments on their invoices. In contrast, a low accounts receivable turnover ratio would be a sign a business has a large amount of unpaid invoices and are owed a large amount of money. It is a good metric to quantify the financial stability of the business and how well companies are managing their cash flow.
Increase Your Accounts Receivable Ratio
Having a balance in your accounts receivable is normal, especially since most businesses use an accrual basis for accounting. But a growing accounts receivable can be detrimental to your business’ success. This is for several reasons, but here are the top three:
- First and foremost, your company did hard work to perform a service or create and sell a product to a client. If there is a big gap between the amount you expect in payment and the amount you’re actually getting (a low accounts receivable turnover ratio), you’re losing money that could be used to reinvest in your business.
- Secondly, if your company needs a loan- some banks will be looking at profit/sale history and question high amounts of accounts receivable. We don’t want you to be denied money you need because of a high amount of accounts receivable.
- Third, when making financial decisions, it is important to both have and understand an accurate cash flow. When you have good systems in place to keep your accounts receivable turnover ratio high, this is possible. However, when businesses fall behind in collecting unpaid invoices- it becomes difficult to know how much money a business really has and make any predictions to inform decision making.
Common Reasons your Accounts Receivable Turnover Ratio is Low
Having a low accounts receivable turnover ratio means that it is taking a long time for you to receive payment after you bill a client (send an invoice). Basically you have a growing amount of unpaid invoices that are aging or getting more overdue. This could be due to:
- Errors on the invoice: It is important to double-check invoices, but is something that can be easily overlooked. If there is a discrepancy between what you told the client and what is on the invoice, this could prolong you getting paid as both parties have to find then decipher the error. In addition, a simple spelling error in the email/name field could keep the invoice from getting to the right person.
- Unclear payment terms: Confusion on when an invoice is due could lead the client to either delay payment or forget and never pay at all. Payment terms will depend on your company’s needs/processes, but whatever they are- make them as clear as possible both on the invoice and throughout communication with the client.
- Insufficient follow-up: Oftentimes clients are well-meaning, but an invoice could get lost in their mailbox. So without prompt reminders about payment due, an invoice can get moved to the bottom of a priority list or forgotten altogether.
Getting Started with CollectPRO (An Accounts Receivable App that integrates with QuickBooks)
Try our Accounts Receivable App
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Ways to Be Proactive about your Accounts Receivable Turnover Ratio
In this section, we’ll provide solutions to the three main challenges mentioned above so that you can be proactive about keeping your accounts receivable turnover ratio high and overdue payments low.
- Ensure the invoice (client details, amount, date, and conditions) is accurate and clear. You could have someone double check or ask the client for confirmation they received the invoice and it matches what you had already discussed with them.
- Be consistent with your payment terms and communicate this to your client, especially if they are updated or if it is your first time working with a client.
- Create a follow-up schedule with templates for varying time periods of reminders. For example, maybe you have a friendly reminder template, a 2nd reminder, and then a more direct reminder email.
Lastly, it is important to note that there are more options if you have a client that is persistent in not paying or communicating with you. You could charge interest on the overdue amount or there are several legal options for collecting an overdue payment. Just be sure to calculate the cost of these measures as well, before you do them.
How to Use Technology to Increase your Accounts Receivable Turnover Ratio
In research conducted by QuickBooks, it was found that 65% of small to medium-sized US businesses (25-200 employees) spend 14 hours per week dealing with late invoices.
A task like collecting late payments shouldn’t be taking away important time you could be investing in your business to grow/succeed. So, we at Quattro Software wanted to provide a solution to save you time, money, and maintain customer relationships when dealing with invoices.
Our solution→ CollectPRO : a web-based app created to help you track and manage your open invoices. We have a smooth integration with QuickBooks and more integrations on the way. It addresses all the reasons mentioned, so you can increase your accounts receivable turnover ratio. Key features include: interactive dashboard, customizable statuses, adding notes, sending reminders, and custom printable/downloadable reports. For a full-function, interactive demo- click here: https://demo.collectpro.quattroapps.app/login
