Monitoring receivables turnover is crucial for a business’s financial health. It helps to plan payment schedules, identify financial problems in customers, and demonstrate financial strength to investors.
As an important aspect of the accounts receivable process, monitoring the receivables turnover rate is critical to the financial health of any business. Basically, receivables turnover is the average time it takes for a given customer or group of customers to pay outstanding invoices after they have been generated and shipped to the customer. Having a solid understanding of this average length is good for the business in several ways. Here are some examples of how closely monitoring your receivables turnover can have a positive impact on a company’s financial health.
Most companies define the terms for payment to their customers. A good general standard is to expect payment within thirty days of the invoice date. However, it’s not uncommon for some companies to pay their suppliers on a rotating schedule, sometimes only cutting checks for payment on certain days of the month. This may mean that a vendor whose invoice does not arrive by the first day will have to wait until the second day after the month to get paid and receive a check.
When the process is complete and the payment is received, the average credit turnover can be longer between 45 and 60 days. Understanding that your single largest customer is not likely to issue payments sometime in that period makes it much easier to plan your payment plans to your vendors.
Periodically reviewing accounts receivable turnover can also help identify a customer who is experiencing some financial problems. If a review shows that a particular customer has had an average of thirty-five days in customer revenue over a long duration, but the average has slipped to fifty-nine days over the past three to six months, that’s reason to look into the situation further. While it can be something as simple as a new automated payment system that the customer is using, looking into the situation and determining if there are any imminent problems that could cost your business a lot of money is always a good idea.
Accounts receivable turnover can also be used to demonstrate a company’s financial strength to potential investors. While actual monthly billed revenue is very important, investors will often want to see data on how quickly customer payments are being received. The Accounting Receivable Revenue report can easily show the average amount of time that passes before a payment is received from each customer, as well as show an overall average for the entire customer base. While no one expects revenue to match payment terms exactly, many investors will see it as a big plus if their accounts receivable revenue data points to an overall average of less than a week from their stated payment terms.
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