Accelerating the account receivable or A/R is one of two vital ways to improve the cash flow. You can use this strategy if your business sells to other businesses and extends trade credit. Specifically, the speedier collection of A/R will benefit your business through some ways. First of all, it works by reducing the amount of necessary working capital binds to A/R and converting it to cash. Secondly, it will be able to lessen the overall risk of losses to your business as a result of customer bankruptcy. Thirdly, this strategy will show to the creditors and lenders that you apply a ‘business best practice.’ Lastly, it is also ‘training’ your customers to pay on time.
Speaking of A/R collection will lead you to a discussion about the days of A/R turnover. The days of A/R turnover is the average number of days it takes to collect your company’s A/R. An average outstanding number of A/R from invoice date can be recognized through particular accounting software.
However, if this software doesn’t give you the expected number, there is another helpful way to calculate your outstanding A/R turnover by using the certain formula:
A/R turnover (days) = total outstanding A/R / average daily sales
You can get the daily sales by taking the amount of sales your company gained last month in extended credit and divide by 30.
Furthermore, the average turnover for most industries is 45 days in term of 30 days in a month. Thus, you can learn some effective strategies to enhance your A/R collections. The primary strategy should be applied when you meet the situation of establishing credit for new customers. Ensure that while you expect to provide the highest quality of service possible, your terms are net 30. Take one easy step by having one member of your administrative team to make a collection calls and support the customers politely. Use the sufficient time to recognize your customers’ needs and to establish a good communication whenever there are problems.
Establishing credit limits for all customers is also one proven way. You can check if your customers have any past-due balances whenever they hit credit limit and offer to ship when they pay the past-due balance. Also, turn your customer over to a more professional collection agency before the obligation gets too old, this is one significant way when you figure out that your costumer is a true collection problem. The last one can become really effective strategy is by having company’s owner or anyone from senior management call the senior management of every customer periodically to thank them for their business and especially for their punctual payment.