What is Accounts Receivable Turnover and Why Does It Matter?
Accounts receivable turnover is a key financial metric that measures the effectiveness of a company's credit and collection efforts. It shows how quickly a business can collect outstanding credit from its customers[^1^]. A higher turnover rate indicates that the company is efficiently managing its credit policies and collecting payments faster, while a lower turnover rate signals potential issues with cash flow and credit management.
The importance of accounts receivable turnover cannot be overstated. It directly impacts a company's cash flow, which is essential for covering operating expenses, paying debts, and making investments. By keeping track of this metric, businesses can identify areas where they may need to improve their credit policies or collection processes.
How to Calculate Accounts Receivable Turnover
Calculating accounts receivable turnover is a straightforward process. First, determine the net credit sales for a specific period (usually a year). Net credit sales are the total sales made on credit, minus any returns or allowances[^1^]. Next, find the average accounts receivable for the same period. This is the sum of the beginning and ending accounts receivable balances, divided by two. Finally, divide the net credit sales by the average accounts receivable to obtain the accounts receivable turnover[^1^]:
Accounts Receivable Turnover = Net Credit Sales / Average Accounts Receivable
Strategies for Improving Accounts Receivable Turnover
There are several strategies businesses can implement to improve their accounts receivable turnover:
- Implement Clear Credit Policies: Establishing clear and consistent credit policies can help minimize the risk of late payments and improve cash flow[^3^]. Clearly communicate these policies to customers and review them regularly to ensure they remain relevant.
- Offer Early Payment Discounts: Encourage customers to pay their invoices early by offering discounts for prompt payments[^4^]. This not only improves cash flow but also builds positive relationships with customers.
- Send Reminders and Follow Up: Regularly send reminders to customers about upcoming due dates and follow up on overdue invoices[^5^]. Timely communication can be crucial in maintaining healthy accounts receivable turnover.
- Use Technology to Streamline Processes: Leverage technology to automate invoicing, payment processing, and collection efforts. This can help reduce manual errors and improve overall efficiency[^2^].
How PingPong Payments Can Help
PingPong Payments offers multiple payment options for customers, including ACH, wire transfer, credit card, and wallet-to-wallet instant transfers. With direct integration with Quickbooks Online and Xero, PingPong Payments simplifies the payment process, reducing up to 80% of manual tasks, and streamlines your accounts receivable management. By using PingPong Payments, you can save up to 90% on transaction fees, and improve your accounts receivable turnover rate.
"I switched to PingPong Payments a few months ago, and I couldn't be happier with the results. The seamless integration with my accounting software has made managing my accounts receivable so much easier. My cash flow has significantly improved, and I've saved a lot on transaction fees. The dedicated account manager and global support team have been fantastic, providing timely assistance whenever needed. Highly recommended for any business looking to optimize their accounts receivable processes."
- Garrett Anderson,
Financial Controller
