Turn...Turn...Turn...Your Accounts Receivable That Is!

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.

Every dollar you have in accounts receivable is a dollar you don’t have in your checkbook. Manage those dollars wisely and it will pay big dividends.

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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"

Put his twenty-five years of experience to work in your business. Contact Scott today.

Comments

[Todd]

Ive been trying to work out the Accounts Receivable Turnover value. I really appreciate your advice.