How to improve your accounts receivable turnover ratio
Hard fact: If you’re waiting around for customers to pay, you’re not really in control of your cash flow. And that’s a dangerous game to play when you’ve got bills piling up.
If you’ve ever felt like your cash flow is stuck in a traffic jam, you’re not alone. A lot of businesses struggle with slow-paying customers, and the impact on cash flow can be brutal.
The thing is, getting paid on time isn’t just a nice-to-have — it’s what’s keeping your business in business.
The key to making sure you’re turning invoices into cash as quickly as possible? Keeping a close eye on your accounts receivable (AR) turnover ratio.
But before we dive into how to improve that ratio, let’s break down what it is and why it matters.
What is the accounts receivable turnover ratio?
Your AR turnover ratio is like a report card on how efficiently your company collects payments. It measures how often you’re turning your receivables into cash over a certain period of time.
- A high ratio means you’re collecting payments quickly—no cash just sitting around waiting to be used.
- A low ratio is a sign you’ve got an AR collections problem, and it’s putting the brakes on your entire operation.
Here’s the formula for AR turnover:
Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable
It’s a simple equation that shows how quickly your customers are paying their bills — and whether you’re keeping cash flowing or letting it get stuck in limbo.
You’re looking at two key numbers: your net credit sales (that’s all your sales on credit, minus any returns or discounts) and your average AR balance over a set period. The result? A ratio that tells you how many times you’re collecting on your outstanding credit sales.
Let’s break it down with an example:
Say Company Z has $9 million in net credit sales for the first quarter of the year. Their average AR balance was $1.5 million. Divide $9 million by $1.5 million, and you get a turnover ratio of 6. That means they’re collecting on their sales about six times in that period.
What’s a good accounts receivable turnover ratio?
Here’s where things get a little more nuanced. A high AR turnover ratio generally means you’re doing a good job collecting payments quickly, while a low ratio suggests some inefficiencies in your AR collections process. But, “good” is relative.
It depends on your industry, your typical AR payment terms, and how tightly you manage your credit policies. A company that operates on a net-30 basis should aim for a turnover ratio that reflects collections happening within that 30-day window.
High AR turnover vs. low turnover: what does it mean?
High AR turnover
If you’ve got a high AR turnover ratio, chances are your credit policies are strict, and your invoicing and AR payment terms processes are on point. Maybe you’ve set clear terms, sent invoices promptly, and given customers incentives to pay quickly (like early-payment discounts). In short, you’re turning those sales into cash, fast.
Low AR turnover
If your ratio is on the lower side, it could mean you’re letting customers take too long to pay. Maybe your credit approval process is a little too loose, or perhaps you’re not following up on overdue invoices. This can put a serious drag on your cash flow and leave you scrambling to cover your own bills. A low AR turnover ratio means it’s time to rethink your AR collections processes.
How to improve accounts receivable turnover
If your AR turnover could use a little boost, don’t worry—there are plenty of ways to tighten up your process and get that cash flowing faster. Here’s where to start:
1. Strengthen client relationships
Customers are more likely to pay on time if they value your business. Sounds simple, right? The trick is making sure you maintain strong relationships while being firm about AR payment terms and expectations. Communicate regularly, and don’t be shy about reminding them when payment is due. A positive relationship can help you negotiate better AR payment terms or even speed up AR collections.
2. Vet your customers before extending credit
We’ve all been there — too eager to make the sale and offering credit to customers who maybe shouldn’t have it. Tighten up your credit approval process. Run credit checks, look at payment histories, and don’t hesitate to turn down or limit credit to customers who aren’t reliable. Being selective about who gets credit can keep you from chasing down payments later, i.e, improved AR collections.
3. Automate your invoicing
Invoicing delays are one of the easiest problems to fix. AR automation software, like the solution from Corcentric, ensures invoices go out like clockwork — essential to getting paid. Automation can also help you send payment reminders and track who’s paid and who hasn’t, keeping everything organized and on schedule.
4. Set clear payment terms upfront
Don’t leave anything to chance. Make sure your payment terms are crystal clear from the beginning. Whether you’re billing on net-30, net-60, or something else, lay out the expectations in your contracts and invoices. And while you’re at it, consider syncing your payment terms with your payables — make sure the cash is coming in before the bills are due.
5. Make it easy for clients to pay
If your clients have to jump through hoops to make a payment, you’re giving them an excuse to pay late. Make it easy for them to pay you by simplifying the process as much as possible through offering multiple payment options—credit cards, ACH transfers, online payment platforms, and even mobile payments. The easier you make it for them, the faster that money hits your account.
6. Offer early payment incentives
Want to nudge your clients into paying faster? Offer a discount for early payments. It doesn’t have to be huge — even a small percentage can motivate customers to settle up sooner. On the flip side, make sure there are consequences for late payments. A well-structured carrot-and-stick approach can keep your cash flow steady.
7. Implement a strong AR collections strategy
Sometimes, even with the best processes in place, payments are late. Having a well-defined AR collections strategy can make all the difference. Start with automated reminders and follow up with phone calls if necessary. If the account remains overdue, escalate to a collections agency or consider legal action. The goal is to keep your cash flowing, not let overdue invoices pile up. And, if possible, do it without wrecking the customer relationship.
8. Train your AR team
Your AR team is on the front lines of your cash flow. Make sure they have the skills and tools to do their jobs effectively — whether it’s negotiation tactics, understanding legal regulations, or simply knowing when to escalate an overdue invoice. A well-trained team can be the difference between getting paid on time and letting debts linger.
9. Leverage data and monitor KPIs
Instinct and gut feelings have their place, just not in AR management. In an age of data, you have to rely on the numbers. Key performance indicators (KPIs) like days sales outstanding (DSO), the percentage of overdue accounts, and the average age of receivables can give you a clear picture of how well your AR process is working.
Using real-time data empowers you to make more informed decisions, and it also provides a basis for adjusting your strategy when necessary.
10. Automate your AR processes
1992 called and they want their manual processes back.
Seriously, if you’re still using some or all manual processes for your AR management, you’re just begging for delays, errors, and wasted resources. AR automation reduces the likelihood of mistakes and frees up your team to focus on more strategic tasks.
By automating AR collections, AR payments tracking, and reminders, you’ll accelerate the process and keep everything running smoothly without the hassle of constant oversight.
Managed AR = Instant AR turnover improvement
Want an easier fix for your AR turnover ratio? Outsource your accounts receivable management altogether. Why? Because managed AR offers an array of strategic benefits beyond just streamlining the collections process, and it does it effortlessly.
First, managed AR gives your finance team back valuable time, letting them focus on more high-value work rather than chasing overdue invoices. Managed AR services leverage specialized expertise and advanced tools that many in-house teams might not have access to, ensuring more consistent follow-up, faster collections, and reduced bad debt.
Plus, outsourcing can bring in best practices across industries, driving continuous improvement in your AR processes.
For instance, Corcentric Managed AR integrates seamlessly with your company’s existing systems, delivering real-time insights and more accurate forecasting for cash flow planning. This comprehensive approach ensures smoother operations without the day-to-day burden of collections on internal teams. Better outcomes with fewer inputs – what’s not to love?
The upshot
To sum it up: improving your AR turnover ratio is all about efficiency, automation, and data. With the right tools — a cloud-based AR management solution, multiple payment options, and solid client relationship management — you’re not just improving your AR collections process; you’re creating a smoother, faster, and more predictable cash flow
And when your cash flow is predictable, you’ve got more room to invest in opportunities, take on new projects, or weather the occasional hiccup. It’s about creating a system that keeps your cash flowing so you can focus on growing your business.
That’s where Corcentric comes in.
With our suite of AR automation solutions, you can streamline invoicing, collections, and payments, all while reducing manual work and improving accuracy. Or, Corcentric Managed AR can turn your AR function into best in class, instantly.
So, whether you’re dealing with slow payers or just looking to tighten up your process, we can help you turn those receivables into real revenue.
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Ready to up your AR management game? Download our Ultimate Guide to AR Management. This comprehensive guide dives deep into everything from segmentation strategies to the latest e-invoicing solutions and provides actionable insights to help you streamline cash flow and reduce days sales outstanding (DSO).