Increasing your accounts receivable turnover should be one of your top priorities as a business owner. After all, until you get payment from customers, the money you make from selling your goods or services on credit cannot legitimately be considered income. Your cash flow, which is among the finest measures of long-term business performance, will be greater as a result of your improved ability to manage your accounts receivable and collect client payments.
What is Accounts Receivable Turnover ?
How well your company converts its accounts receivable into cash in the bank is determined by the amount of turnover of accounts receivable. The Accounts Receivable Turnover Ratio is a metric that shows how effectively you provide credit to customers and collect money owed.
Why Does Your Accounts Receivable Turnover Matter ?
The more cash your company has available to pay its expenses and service its debts, generally speaking, the greater your accounts receivable turnover ratio.
Conversely, a low turnover may indicate that your company:
Insufficient credit control procedures,
A careless method of collecting payments from customers
Untrustworthy customers in terms of finances
For the sake of your company's financial stability, you must carefully review your credit policies and accounts receivable procedures. In light of that, here are 11 suggestions to assist you increase the turnover of accounts receivable.
6 Tips To Improve Your Accounts Receivable Turnover
Establish trusting connections with customers
Building solid client relationships is the first rule of thumb for accounts receivable management. The majority of your satisfied clients will be glad to pay you for the products or services you've rendered. tiny acts of kindness, such as a quick phone call or email to check in with your clients, can go a long way towards ensuring that you receive payments from them on time, regardless of whether you own a tiny business or a large, expanding corporation.
Accurately, punctually, and frequently invoice
The easiest type of bill for your customers to pay is an accurate, comprehensive invoice! You should bill frequently and on promptly, though, as this is equally crucial. Companies that provide invoices after their due dates run the danger of being known for accepting them.
Avoid the error of not billing your consumers until the balance due is relatively high. It's more likely that clients will have forgotten about services or goods they received more than a month ago if you bill them for them. Customers find it less intimidating to pay small, frequent invoices as opposed to a single, sizable quarterly invoice.
Specify the terms of payment
Clearly stating the terms of payment on your invoices can help your accounts receivable succeed. Ask for payment within Net 30 days, and don't be shy about including late payment fees.
Typically, late payment penalties represent a portion of your initial invoice total. Setting credit limits or providing payment plans may be a good idea if you sell goods or services with a higher price tag.
Reduce payment terms
You could also reduce your payment conditions to close the payment window. Your payment terms, however, should be chosen in accordance with the customs of your sector. If, for instance, your industry standard is net 60 and you're giving net 30, you might not get as much business if the transaction value is big or your clients are cash flow sensitive.
Make early payment discounts available
Early payment incentives may have a cost, but they may be outweighed by the cash inflow and time saved on collecting.
If your customer pays by day 10 after the invoice date, you may arrange your payment conditions to be 1% 10 Net 30, which gives them a 1% reduction on the bill. Customers who are trying to cut costs might be more likely to take full advantage of this deal, which would increase your cash flow quickly.
Make your billing system simpler
By switching to fixed-fee billing, a lot of service-based organisations have reduced their troubles with accounts receivable. In essence, you provide the same monthly services at a fixed price when you and your client agree to a service contract. And it can help a great deal in lessening the anxiety that frequently arises when a client receives a larger invoice than anticipated.
The usage of pre-authorized debit to automatically take payments each month from your clients' accounts is further made simpler by fixed fee billing arrangements. Because of this, fixed-fee billing achieves an efficient balance between giving your consumers billing transparency and guaranteeing you get regular payments on time.
Always keep in mind that improving accounts receivable turnover through management, monitoring, and improvement is essential for more stable cash flow. Tracking your turnover will not only enable you to identify patterns in your accounts receivable practices, but you can also utilise that data to evaluate the economic impact of your actions.