One of the many issues a business faces is keeping their receivables under control. So unless you are a cash only business, keeping tabs on this is critical. The two key parts of the puzzle are quality and liquidity. Quality means the likelihood of collection and liquidity refers to the speed of collection.
As a business grows, a good indicator of the efficiency of your process is a ratio called Accounts Receivable Turnover. This is simply:
Turnover = Sales / Average Accounts Receivable
Your sales should only count those on credit while the average accounts receivable is:
Average Accounts Receivable = (Beginning Balance + Ending Balance) / 2
The beginning and ending balances can be found on you balance sheet. If you are using QuickBooks, you would go to Reports, then Company and Financial and then select the Balance Sheet Standard entries for Accounts Receivable from the two periods and divide by two. So let’s say that you run a landscaping business and your sales for the year are $65,700 and your average accounts receivable is $35,800. Your Turnover is:
$65,700 / $35,800 = 1.8
What this means is that your receivables are being converted into cash 1.8 times during the period used, usually a quarter or a year. Is this good? Not really. A typical landscaping company should have its accounts receivable turnover somewhere around ten.
So some corrective action is probably needed. In a future blog, we will discuss some of the QuickBook Reports that we can use as a starting point to dive into the details and set up a plan to improve our cash flow from accounts receivable.
About the Author: Ron Miaso, one of the QuickBooks Yoopers, is a Certified QuickBooks ProAdvisor in Desktop and Online and before forming Delta Business Solutions was a Senior Finance Manager in the auto industry where he managed a $500 million annual operating budget and helped develop long range business plans.
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