Cash Flow is the lifeblood of every business. This is what makes the difference between the 34% of businesses that make it after 10 years vs those that don’t. It doesn’t matter if you’re profitable or not. What matters is that you have positive cash flow. That is what means the difference between making payroll or not making it. One way to improve cash flow is by improving accounts receivable turnover.
Accounts receivable turnover is the time it takes to collect a receivable. When you invoice a customer you may have net 30 terms, but how long does it REALLY take to collect?
You can calculate this amount as follows:
Accounts Receivable ÷ Net Credit Sales * 365
|Net Credit Sales||7,100,000.00|
In the above example it take on average 33 days to collect a receivable. This may or may not be good. It depends on the industry you’re in.
Whatever is considered good, you can always improve cash flow by lowering this number.
How to lower your Accounts Receivable Turnover number
This part is neither mathematical nor scientific.
Mike Milan gives a great example of how he did this in one of his former businesses in this episode of The Authentic Accountant Podcast:
You’ll have to talk to your customers (imagine that). This means there is a careful balance. If you lean too hard on your customers for faster payment, you can lose them.
The best trick for improving accounts receivable turnover is to get paid up front. I did this in my own business years ago. It was unheard of. As soon as I started doing it, people told me they respected it. Many said they needed to start doing the same in their business.
Look if your customer wants you to do the work right away, why shouldn’t they be willing to pay right away?
Short of that, you will have to find away to appeal to your customers to appreciate your situation and help you out by paying you faster. Most companies who struggle with their own cash flow will prioritize based on who can hurt their credit. That sucks, but it’s the hard reality.
As Mike puts it, you have to get them to think if you as an employee instead of a paper towel!
Need to take a closer look at improving accounts receivable turnover for your business?
Check out the video above and CashFlowTool.com (see video).
Here are some other resources on our website:
Speed of Cash Zoom with Mike Milan
Cash Flow Management with Cash Flow Tool.com