In addition to being the title of the timeless tune from The
Byrds, this phrase also comes into play in relation to your customers –
collecting payments from them that is.
When dealing with your accounts receivable (the fancy
accounting lingo for money that your customers owe you), it is critical to set
up key metrics to track your performance in collecting those funds. The idea is
to “turn, turn, turn” your accounts receivable over on a regular basis to get
the funds into your checking account as quickly as possible.
To help build your knowledge in this area, there are two key
indicators (among others) you should know:
1)
“Accounts
Receivable Turnover” – this tells you how effectively you are managing your
receivables. Here is the formula to calculate it:
A/R Turnover = Net Credit Sales / Average Accounts Receivable
For this measurement, a higher number/turnover is definitely better!
2)
“Days Sales
Outstanding” (DSO) – this tells you how many days it is taking to collect
payments from your customers. Here is the formula:
(Total Accounts Receivable / Total Credit Sales) / # of days in measurement
period. For this formula, a lower number is definitely better (it takes
less time to collect!)
For example: If your total A/R = $50,000, your total credit sales are $100,000
and the total sales figure is for a 90 day period, the equation would be:
(($50,000 / $100,000) x 90). The Days Sales Outstanding = 45 days. In this example,
it takes the business, on average, 45 days to collect from their customers.
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Scott Gregory provides CFO and controller services to service, manufacturing and distribution businesses in Northeastern Ohio.
He is very fluent in the following dialects often heard yet rarely understood by business owners:
- "Accounting-speak"
- "IT jargon"
- "Inventory gobbledygook"
- "Banking banter"
- "Internet and e-commerce cyberbabble"
