How to Improve Your Accounts Receivable Turnover Ratio
What is Accounts Receivable Turnover Ratio
Your accounts receivable turnover (ART) rate or ratio indicates how many times in a year your business collects the amount reflected in your average total accounts receivable for a given period. For example, if your accounts receivable turnover for a period is 10/1 or 10, that means you can collect that amount ten times in one year. Your ART helps you measure the performance of your AR department during.
Why Your AR Turnover Rate Is Important
As we said above, your ART will help measure your accounts receivable department's performance. It will also help you determine your company's ability to issue credit and collect. Your ART will impact your entire planning process, sales process and your cash flow.
How to Calculate Accounts Receivable Turnover Ratio
To calculate the accounts receivable turnover rate, you have to start by calculating your average accounts receivable--Add period-beginning AR to period-end AR and divide by two. This is your average accounts receivable for the period. Next, determine your net credit sales for the year and divide that number by the average accounts receivable to determine your accounts receivable turnover.
ART = net credit sales / (period-beginning AR + period-end AR) ÷ 2
What is a good Accounts Receivable Turnover Ratio
Like any metric, this depends on the business. However, you can determine this for yourself by thinking about your ART in the number of days it takes to collect the amount of your average AR. Using the example above, if you have an ART rate of 10 (collect average AR 10 times per year) that means it takes you about 36.5 days to collect the amount of your average accounts receivable. That means it takes about a month and a week to collect the average AR. The higher the ratio the faster you collect, so businesses have to determine what their own ART goal is.
How to Accelerate Accounts Receivable Turnover
The first step is tracking your ART and determining your target turnover time based on your industry's average ART and other factors. After you have determined this, the following tips are some ways to speed up your accounts receivable turnover and hit your target ART.
- Improve customer relationship management--happy customer are more likely to pay on time
- Get more proactive in your collections strategy
- Go digital to improve billing process
- Use automated billing reminders
- Encourage customers to enroll in auto pay
- Deploy a customer payment portal
- Offer early pay discounts
How AR Automation Can Help
Automation is key to making your entire AR department more efficient. With the right solution that connects directly with your accounting software, you can start implementing the 7 tips above as soon as you go live. Automation is proven to help you get paid faster and reduce accounts receivable overhead. What's more, the right software will help you more accurately track key performance indicators like your ART. To learn more about functionality you should expect to find in an AR automation solution, check out these 7 receivables automation functions to get paid faster and reduce collections costs
If your business is still relying completely on the out-of-the-box AR features in Microsoft Dynamics GP, Fidesic AR can help you streamline your entire AR process and get paid sooner with fewer headaches.