Accounts Receivable Management
Accounts receivable turnover measures how efficiently you collect customer payments. Calculate by dividing annual revenue by average AR balance. With $1,000,000 revenue and $150,000 average AR, turnover is 6.67 times yearly, meaning you collect every 55 days on average. Faster collection improves cash flow and reduces bad debt risk.
Days sales outstanding (DSO) shows average collection period - lower is better. Most B2B companies target 30-60 days depending on payment terms. Compare your DSO to payment terms (if terms are net 30 but DSO is 60, you have collection problems). High AR ties up cash you could use for operations or growth.
Improve collections by invoicing immediately, offering early payment discounts, following up promptly on overdue accounts, screening customer creditworthiness, requiring deposits for large orders, and using automated payment reminders. Strong AR management directly improves cash flow without increasing sales.
Quick Tips
- Always compare APR, not just interest rates
- Use the Rule of 72 to estimate doubling time
- Extra payments dramatically reduce total interest
Frequently Asked Questions
Depends on payment terms. If terms are net 30, aim for 30-40 days. If net 60, aim for 60-70 days. Significantly exceeding payment terms indicates collection problems requiring attention.
Invoice immediately after delivery, offer early payment discounts (2% if paid within 10 days), send payment reminders, follow up on overdue accounts, require credit checks for new customers, and consider offering payment plans for large invoices.
Often yes - a 2% discount for payment within 10 days can improve cash flow significantly. Calculate whether the discount cost is less than financing costs or value of having cash sooner. Usually worth it.