In 2023, many contractors are worried about the economic downturn and its impact on the construction industry. During a recession, collecting payments can be challenging. Clients may dispute invoices or request payment extensions. This can lead to delayed payment cycles and hurt cash flow.
Accounts receivable turnover (ART) is a good indicator of your company's payment speed. Having a high accounts receivable turnover (ART) ratio is a crucial way to maintain cash flow. In this blog post, we'll share 14 tips to improve your ART. Using these tips, you can ensure your business can thrive and survive in any climate.
Table of Content:
What is Accounts Receivable Turnover?
Accounts receivable turnover measures how quickly you are collecting payments from your customers. It's calculated by dividing your net credit sales by the average A/R balance. The resulting number indicates how often your business collects its receivable balance over a payment term.
Accounts Receivable Turnover Ratio Formula
The accounts receivable turnover formula is:
ART = Net Credit Sales / Average Accounts Receivable
If you are curious about how to calculate accounts receivable turnover and want to learn more about the formula, check out our blog post.
Why Does Your Accounts Receivable Turnover Matter?
A high ART is vital for managing cash flow and ensuring the success of your construction business. It means that you are collecting payments from customers quickly. This can help you in the following ways:
With available cash on hand, you can pay bills and employees on time.
You can invest in business growth and expansion.
You can take on more projects and work with larger clients.
On the other hand, a low ART ratio can show that your customers are taking longer to pay their invoices. This leads to cash flow problems and hurts your business in several ways:
You may struggle to pay your own bills, leading to financial uncertainty.
You may have to delay projects or turn down new work due to a lack of cash flow.
In severe cases, you may face bankruptcy or go out of business.
It's worth knowing that a high accounts receivable turnover (ART) ratio is usually a good thing. However, it can be problematic if your credit policies are too restrictive and hurt your sales. So, it's essential to strike a balance between having a high ART ratio and being flexible to accommodate your customers' needs.
14 Tips to Improve Your AR Turnover
Now that we've covered why ART matters, let's dive into some tips to help you improve your ART rate:
1. Include Payment Terms on Invoices:
Include clear payment terms on your invoices and communicate them to your customers to avoid payment confusion.
2. Have Clear and Accurate Invoices:
Make sure invoices are clear and accurate. The invoice should include payment terms, due dates, and payment methods.
3. Offer Multiple Payment Options:
Make it easier for your customers to pay such as credit cards, checks, and online payments
4. Invoice Timely and Accurately:
Send invoices to your customers quickly, and ensure that they know how much they owe and when payment is due.
5. Follow Up on Late Payments:
Don't hesitate to follow up with customers who haven't paid on time. Often, all it takes is a polite reminder to get someone to pay.
6. Identify Potential Payment Issues Early:
Keep an eye out for potential payment issues, such as late payments, and address them promptly to avoid further delays
.
7. Offer Discounts for Early Payment:
Offer incentives, such as discounts, for customers who pay early to encourage timely payment.
8. Consider Payment Plans:
Offer written payment plans for customers who may need more flexibility in their payment schedules.
9. Monitor Your Accounts Receivable Aging Report:
Regularly reconcile and review your aging report to track overdue payments and take action.
10. Establish a Collections Process:
Implement a clear collection process for dealing with overdue invoices.
11. Review and Adjust Your Credit Policies Regularly:
Look at your credit policies and adjust as needed to improve your ART ratio.
12. Automate Accounts Receivable Management System:
Set up an accounts receivable management system to automate your A/R process and reminders.
13. Maintain Good Customer Relationships:
Strong customer relationships can improve payment speed and encourage repeat business. Stay in touch with your customers and address any issues quickly and professionally.
14. Hire a Bookkeeping Service
Consider hiring a bookkeeping service like CCA to handle your A/R process and improve your ART rate. This can help ensure that invoices are sent promptly, payments are collected on time, and potential payment issues are addressed promptly.
In Conclusion,
Maintaining a healthy accounts receivable turnover ratio is critical for financial stability and success. By following the tips outlined in this article, you can improve your ART ratio, reduce the risk of delayed payments, and increase your cash flow.
At CCA, we understand the challenges that construction businesses face in managing their accounts receivable, particularly during tough economic times. That's why we provide accounts receivable services specifically tailored to the needs of construction businesses. Our bookkeepers can help streamline your accounts receivable process, reduce your risk of non-payment, and improve your cash flow.
Get in touch with us right now to find out more about how we can help your construction company succeed.