As an important aspect of the Accounts Receivable process, monitoring the rate of Accounts Receivable Turnover is crucial to the financial health of any business. Essentially, Accounts Receivable Turnover is the average amount of time that it takes a given client or group of clients to pay outstanding invoices after they are generated and mailed to the customer. Having a firm understanding of this average duration is helpful to the company in several ways. Here are a few examples of how careful monitoring of Accounts Receivable Turnover can make a positive impact on the financial strength of a company.
Most businesses define the terms for payment to their customers. A good general standard is the expectation of payment within thirty days of the invoice date. However, it is not unusual for some companies to pay their vendors on a revolving schedule, sometimes only cutting checks for payment on specific days of the month. This can mean a vendor whose invoice does not arrive by the first day will have to wait for the second day later in the month to be cleared for payment and be issued a check.
By the time the process is complete and the payment is received, the Accounts Receivable Turnover average may be more along the lines of forty-five to sixty days. Understanding that your single largest customer is not likely to issue payment until sometime in that period makes it much easier to plan your own payment schedules to your vendors.
Periodic review of Accounts Receivable Turnover can also help to spot a customer that is experiencing some financial issues. If a review shows that a given client had an Accounts Receivable Turnover average of thirty-five days over a long duration, but the average has slipped to fifty-nine days over the last three to six months, that is reason to look into the situation further. While it may be something as simple as a new automated payment systems the customer is using, looking into the situation and determining if there are impending problems that could cost your company a lot of money is always a good idea.
The Accounts Receivable Turnover can also be used to demonstrate the financial strength of a company to prospective investors. While the actual monthly billed revenue is very important, investors will often want to see data on how quickly those customer payments are received. The Accounts Receivable Turnover report can easily show the average amount of time that passes before a payment is received from each client, as well as showing an overall average for the entire client base. While no one expects the turnover to match the exact terms of payment, many investors will consider it a big plus if the Accounts Receivable Turnover data indicates an overall average of less than a week from the stated terms of payment.
