Accounts Receivable Turnover

//Accounts Receivable Turnover

Accounts Receivable Turnover

Do you know what your AR is costing you?

 

Why accounts receivable?

  • Increase sales.

Downside of Accounts Receivable

  • Bad debt

  • Opportunity cost of cash

  • Additional staff required to maintain accounts

  • Interest cost if business has to take loan to meet working capital needs

  • Background checks/ collection services

  • Office supplies like paper and ink sent to customers who owe

Credit card and accounts receivable

When you offer your customers the choice to pay accounts receivable with credit cards, you increase your cost of credit. One of the main functions of accepting credit cards is the ability to collect payments faster.

AR WITH CREDIT CARDS DEFEATS THIS PURPOSE.

How Did We Get Here?

  • MOST TIMES WE SIMPLY DO WHAT EVERYONE ELSE IS DOING WITHOUT THINKING ABOUT THE BEST APPLICABLE SOLUTION FOR OUR BUSINESS.

Available Options

  • If you accept credit cards FOR AR, think about adjusting your policies where customers pay before they get the final good or deliverable.

    • In exchange for credit card fees, you should reduce your chances of accumulating accounts receivable.

  • BE INNOVATIVE – YOU DON’T HAVE TO DO THINGS LIKE EVERYONE ELSE

ACCOUNTS RECEIVABLE TURNOVER

The turnover ratio computes how many times accounts receivable is turned to cash in a year. The higher the ratio, the shorter the collection period.

Accounts Receivable turnover example

  • Accounts Receivable Turnover = Sales/ Accounts Receivable

    • Sales = $1,000,000

    • Accounts receivable = $250,000

    • AR turnover = $1,000,000/ $250,000 = 4 times

  • Number of days to collect = 365/ accounts receivable turnover ratio

    • 365/4 = 91.25 days

  • This means it takes an average of 91.25 days to collect.

    Next let us compute the cost.

COST OF CREDIT SALES

  • Every month you keep your accounts receivable there is a cost

Summary

In exchange for credit card fees, you reduce your chances of accumulating accounts receivable. If you are not in the credit business or your credit sales does not increase total revenue in any way, then you are spending way too much on accounts receivable.

Get more detailed analysis:

http://www.retirefrommybusiness.com/product/module-2/

By | 2017-11-03T18:05:42+00:00 November 2nd, 2017|Comments Off on Accounts Receivable Turnover

Lifestyle CPA

Financial Keepers, LLC
Innovate Springfield
15 South Old State Capitol Plaza,
2nd Floor Springfield, IL 62701
Telephone: 417-812-5945

Phone

417-812-5945