Accounts Receivable Collections: Accounts Receivable Turnover| A/R Policy

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Accounts Receivable Collections:
Reducing Your
Accounts Receivable Turnover

In today's economy and business climate, accounts receivable collections is more important than ever. Reducing accounts receivable turnover with better management techniques means this has to be top priority.

Even in good economic times, but especially in difficult times, businesses need to have a sound and consistent accounts receivable policy. Here's one reason why: let's say that your business operates with a 5 percent net margin. As this relates to accounts receivable collections, this means that for every dollar lost, or that goes uncollected, you must generate an additional $20 in new sales just to replace that uncollected dollar!

Consider that during a bad economy, you're far more likely to write off bad debt.

Here are some accounts receivable policy tips to put in place:

Be Aware of Your Accounts Receivable Turnover Ratio

A/R turnover ratio simply means your business' net credit sales, divided by its outstanding, or unpaid A/R. This number reflects how long your customers wait before paying what they owe you. Because you're indirectly extending an interest-free loan to your clients, a high ratio can either mean that your company operates on a cash basis or that your extension of credit and accounts receivable collections is very efficient. A low ratio means just the opposite: you're probably not collecting from your customers in a timely fashion.

Require Credit Applications

Part and parcel of any sound accounts receivable policy is taking credit applications from new customers. In addition to all the usual information (name, address, length of time in business, etc.), you should also ask for social security numbers of all signatories. Its also a good idea to ask for a personal guarantee, if you can get it. Its also a good idea to obtain a business credit report for important transactions. Credit reports can be obtained from a number of providers. Some collection agencies even offer it as a standalone service for a small fee.

Extend New Credit Cautiously

While just about every business needs to have the ability to extend credit, you must do so carefully. Be particularly concerned about customers who suddenly want to grant you all of their business, and away from a competitor. This is especially the case in a bad economy. Its very possible this customer may have been put on credit hold by their present supplier. This can spell potential future bad news for you, should they default on their credit obligations.

Set Firm Credit Limits

Reduce your accounts receivable turnover setting and regularly monitoring your company's credit limits. This is especially the case with new customers. These limits can be changed for those good-paying customers who warrant it. But pay attention to your outstanding A/R and make sure it doesn't get out of hand.

Look For A/R Patterns

If your business has sound credit and collection policies in place, you can better pay attention to A/R trends in your organization. Is your A/R turnover increasing, in spite of sound credit policies? This can reflect a slowing of business overall. Is this trend more isolated to a particular customer, or few customers? For instance, is a particular customer starting to get lax on their payments, when they've been consistent in the past?

Customer Contact Is Paramount

Customer communication is key to any successful accounts receivable collections policy. You should communicate with all of your customers regularly. You should contact your slow-paying customers every 10-15 days so ensure payment, or make payment arrangements. Stay in touch with your good-paying clients as well.

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