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Ways To Get Faster Accounts Receivable Turnover With Your Company

by Görkem Talsma

Management accounting is used to improve the way a business flows, and it relies heavily on the financial information of the company. Management accountants use financial statements to calculate ratios, and the ratios are analyzed to find areas that need improvement. One area commonly investigated in businesses is accounts receivable. Here are two things to understand about accounts receivable (AR) and how to improve it to help your company operate more efficiently.

How To Measure Your AR Turnover

Using the AR turnover ratio is one of the best ways to measure how well your AR is working. This ratio will tell you how many times a year you collect your average AR. When you have a high rate, it indicates that your AR is working well, because it means you collect it often. When the number is low, it means you may need to take some steps to improve the way you collect money owed to your business.

To calculate this ratio, you must begin with the annual credit sales of your company. You must also know the AR balance at the beginning of the year and at the end of the year. With these numbers, you can calculate your ratio by adding the balance of AR at the beginning of the year and at the end of the year. You must then divide this amount by two to determine your average AR balance. Finally, divide your total annual credit sales by the average AR.

A ratio of around 10 is usually good, but the best thing to do is calculate this number often to have something to compare it to.

Ways To Improve Your AR Turnover Rate

There are a number of ways to improve this rate, and here are some tips that may help you with this:

  • Evaluate the terms you offer – If it is taking too long to collect the money owed, it might be because you offer terms that are too long. You may want to consider changing your terms if this is the case. For example, if you offer 90 days to pay, you might want to change this to 30 or 60 days.
  • Implement a better credit check system – If the problem is due to customers not paying their bills on time, you may want to reconsider the way you process credit applications. By increasing your restrictions and guidelines, you might be able to accept customers that will pay their bills, instead of those that do not pay on time.
  • Set up a better collection system – You may also want to reevaluate the way you try to collect past-due bills. If you have a more effective system, it might help you collect faster from the customers that are behind.

Improving your AR turnover can help your company's cash flow. If you would like to learn about more ways to improve your company's financial state, contact an accounting firm in your area.

For professional accounting services, contact an accountant such as Dale K. Cline, CPA PLLC