Accounts receivable (AR) turnover is a financial ratio that measures how effectively your company collects payments from customers. It’s calculated by dividing total net sales by average accounts receivable:
Accounts Receivable Turnover = Total Net Sales / Average Accounts Receivable
This metric shows how many times a company collects its accounts receivable during a specific period, typically a year. A higher turnover ratio indicates more efficient collection practices and better cash flow, while a lower ratio might signal collection problems or overly lenient payment terms.
Let’s look at an example of accounts receivable turnover
We can put some numbers to this ratio to make it more clear how it’s calculated and used. Let’s assume a startup has annual net sales of $10 million, and its average accounts receivable balance during the year was $1.25 million. So $10 million / $1.25 million = 8. That means the startup is collecting on its sales about eight times during the year.
What’s a good accounts receivable turnover ratio?
This part can be tricky. One rule of thumb is that a good AR ratio is generally between 7 and 10, but that depends on your business model, industry, the payment terms you set for your customers, and other factors. As we mentioned, a higher ratio means you’re doing a good job of collecting your payments, while a lower ratio may mean that you’re letting your customers take too long to pay. That could put a strain on your cash flow, and you may want to revise your collection process.
Why accounts receivable turnover matters for startups
For venture-backed startups, especially those selling to enterprise customers, accounts receivable turnover is important for several reasons:
- Cash flow management. Startups often operate on tight budgets, and as we mentioned, slow AR collection affects your cash flow. Efficient collection practices mean that you have the cash needed to fund operations and growth.
- Fundraising. Venture capitalists use this metric to evaluate a company’s ability to convert sales into actual cash. A high turnover ratio can make your startup more attractive to investors.
- Operational efficiency. This ratio provides insights into your sales and collection processes, helping you identify areas for improvement.
- Financial health. A consistently high turnover ratio suggests a healthy business with satisfied customers who pay promptly.
Strategies to improve accounts receivable turnover
If you need to make your AR collections more efficient, there are some strategies you can use to improve the process and get cash flowing:
- Implement clear payment terms. Clearly communicate payment expectations to customers from the outset. You could also consider offering incentives for early payment.
- Automate invoicing and follow-ups. Use accounting software to send invoices promptly and automate your reminder emails for overdue payments.
- Offer multiple payment options. Make it easy for customers to pay by accepting various payment methods, including credit cards and electronic transfers.
- Conduct credit checks. For B2B startups, implementing a strong credit approval process for new customers could minimize the risk of late or non-payment.
- Regularly review and adjust. Continuously monitor your AR turnover ratio and adjust your policies and processes as needed.
How Kruze can help
As specialists in startup accounting, we offer AR services to help you improve your AR turnover ratio:
- Customer invoice management. Kruze can create and submit AR invoices on your behalf on the schedule you prefer.
- AR aging reconciliation. Kruze will maintain and reconcile your AR aging reports.
- Invoicing reminders. Kruze will submit reminders for past-due invoices.
- Invoice trackers. Kruze will establish invoice trackers to make sure your AR reports are accurate.
- Sales team communication. Kruze will work direct with your sales team for invoice tracking, including reviewing purchase orders, contracts, and sales orders.
Turn your sales into cash
Kruze Consulting is committed to helping startups like yours succeed. Don’t let your collection practices hold your company back. Kruze can help you optimize your AR processes for growth and help you protect your startup’s financial health. For more information on our AR services, contact us.
