Your accounts receivable turnover (RT) ratio is a metric that indicates how well you’re collecting on the payments owed by your clients. A high RT suggests an efficient collection process where the majority of clients pay their invoices on time. Low RTs can be a red flag of potential process inefficiencies that’ll need to be addressed.
RT is one of the most important metrics to track in your collections process.
The Receivable Turnover Formula
Before we cover how to improve accounts receivable turnover, we must review how to calculate accounts receivable turnover. Fortunately, the formula is pretty straightforward:
Net Credit Sales ÷ Average Account Receivables = RT
For reference, you can calculate net credit sales and average account receivables with these formulas:
Sales on Credit – Sales Returns – Sales Allowances
= Net Credit Sales
Starting Receivables + Ending Receivables over a chosen time period ÷ 2 = Average Account Receivables
Why Does the Accounts Receivable Turnover Rate Matter?
Your accounts receivable turnover rate provides valuable insight into the strengths and weaknesses of your collections policies. Primarily, it supports better financial management by giving you a snapshot of the following:
- Customer vetting
- Dunning process efficacy
- Invoicing timeliness
By getting insight into these collections efforts, you’ll gain important information that can be used for forecasting cash flows, identifying poor collections practices, and predicting the long-term viability of your companies practices.
Want to improve your DSO?
Download this eBook to understand how to enhance your collections process with automationDownload Now
Automation: The Best Way to Improve RT in Your Company
What is a good receivables turnover ratio and how can companies work to improve their scores? The ratio itself will depend on your company, but regardless of your business, there are several best practices you can implement to support a higher Receivable Turnover.
Primarily, automated collections solutions should be your go-to strategy for improving Receivable Turnover. There are other, more time-intensive ways to manage the process, but few A/R professionals would argue that automation offers the most bang for your buck in terms of process efficiency:
- Invoice correctly and on schedule – Late invoicing sends the signal it’s okay to make late payments. Increase the odds of getting paid on time by setting up automated invoices in your platform. These tools generate invoices on a set schedule and send them to customers without any risk of errors or mistakes.
- Simplify the payment process – Clients are more likely to make payments when the process is as effortless as possible. Leverage A/R collection platforms to offer multiple payment plans customized to each client’s situation. You can also choose to accept different payment methods as needed by your clients.
- Create smarter workflows – Set up custom workflows for each client that take into account their payment details and schedules. By doing so, you can begin to generate automated reminder emails or follow-ups complete with each customer’s payment information.
This makes it easier for customers to pay; they’ll have error-free records with all of their account details attached, making it less likely the payment process will get bogged down with human error-related problems.
Best of all, automated accounts receivable solutions are relatively easy to set up in your accounting department, particularly when you have an experienced partner behind you.
At Gaviti, we have a time-tested process for integrating our collections management solutions into different companies’ A/R departments. We’ll show you how to leverage these automated account receivable tools to get in-depth insights into your accounting efficiency and suggest specific improvements to generate results quickly.
If you’re ready to stop guessing at A/R collections and start taking a data-driven approach to your business, contact our team at Gaviti and book your demo today!