Accounts receivable turnover is a phrase that means the number of times each year that a business collects on past due accounts receivable. Measured as a ratio, the purpose of accounts receivable turnover is to determine if your business has an efficient credit policy and if your business is successfully collecting.
Determining the Accounts Receivable Turnover of Your Business
Determining the accounts receivable turnover ratio of your business is a relatively simple task once you collect some basic information. You’ll take that information, mentioned below, and follow a specific formula. First, you need to know the net credit sales of your business during a period of time. You can choose an entire year, a quarter, or even a month. You might start out with the yearly number and then look at both quarterly and monthly values to look for specific trends in your accounts receivable turnover and in your sales. Next, you need to know the amount of your average accounts receivable. So, in short, you’re looking for the average amount that each client spends with you during that period. For instance, if you’re an attorney and you primarily handle divorce and child custody, you probably have a general idea of what you charge for a run of the mill case. You can also determine the amount of the average accounts receivable by looking at your company’s receivables amount at the beginning of the year and the end of the year, adding those two numbers together, and then dividing it by two.
Once you have those two numbers, you follow this formula:
Accounts receivable turnover = net credit sales / amount of the average accounts receivable.
As an example, let’s say that last year your business did a total of $300,000 in net credit sales. Let’s say that the average client spent $5,763 with you during that period. So, your formula would look like this: 300,000 / 5,763 = 52.056.
The accounts receivable turnover could be rounded up to 52.06. This number means the average amount of time it takes for an account to turnover. Remember, use the net credit sales and not total sales. If you use total sales, your accounts receivable turnover ratio may be falsely inflated.
What Is a Good Accounts Receivable Turnover?
When the number that you get by completing the formula is particularly high, it can be interpreted in many instances as a good sign because it means that your credit policy (and your credit manager) is only extending credit to those who truly are creditworthy.
So, if your accounts receivable turnover ratio is low, does that mean that you have an issue with your credit policy or credit manager? Maybe, but it can also be indicative of a problem somewhere else in your business. For instance, if you look into how billing and applying payments happen within your company, maybe you’ll find that clients didn’t pay their invoice because they had unanswered questions or because they were unhappy with the service that they were provided. So, if you have a low accounts receivable turnover ratio, it’s important that you look at all the processes involved in your business in order to truly understand why you’re not getting paid.
Get Help with Your Accounts Receivable and Credit Policy
If you’re looking to improve your accounts receivable, credit policy, and looking for ways to collect on past due accounts, contact Clients ARM. We have more than 30 years of experience and we can help. Currently, we’re scheduling free consultations to help lawyers, doctors, architects, and other service-based business owners get the information and help that they need. To schedule your free consultation, contact us now. There’s no obligation!
