Need More Cash on Hand? How Managing Accounts Receivable Can Help
By Jon Orr, Managing Director, Optimas Financial & Accounting Solutions
Would you like to increase your business cash flow immediately? Most business owners would. After all, when you have cash flow problems, every piece of your business financials seems to suffer.
Of course, getting more cash on hand is a tricky proposition when you run a complicated business. The good news is, you don’t necessarily need to increase sales or reduce costs to free up some cash. The secret is in your working capital. After all, when you have cash flow problems, every piece of your business financials seems to suffer.
Working capital is calculated as current assets (cash, accounts receivable, and inventory) minus current liabilities (accounts payable). You can take steps right now to manage the components of your working capital to increase your cash flow. In this article, we’ll look at establishing key performance indicators to help you manage your accounts receivable. Click here to see 10 Tips to Improve Your Accounts Receivable Ratios.
Gain Insight with Key Performance Indicators
There are two financial ratios that are much-needed Key Performance Indicators (KPIs) and help you measure performance over time. The first of these is called the Accounts Receivable Turnover Ratio. It can be represented by the following equation:
Sales / Accounts Receivable = Accounts Receivable Turnover
The Accounts Receivable Turnover Ratio measures the rate at which accounts receivable are being collected on an annual basis. (For example, an Accounts Receivable Turnover Ratio of 8.75 means that the average dollar volume of accounts receivable is collected nearly ten times during the year.) By increasing the Account Receivable Turnover Ratio, you will decrease the amount of cash tied up in outstanding receivables – which will help you improve cash flow.
The other useful KPI is called Days Sales Outstanding, which is a ratio of the average number of days the company must wait for its accounts receivable to be paid. It can be represented this way:
360 / Accounts Receivable Turnover Ratio
For example, a Days Sales Outstanding of 41 means that it takes the company 41 days on average to collect its receivables. By decreasing the time it takes to collect your receivables, you can decrease your accounts receivable balance and increase cash.
Which Financial Ratio Is Right for Your Business?
What is the right Accounts Receivable Turnover or Days Sales Outstanding financial ratio? Practices vary from industry to industry; there is no magic number that’s right for all companies.
The best way to determine whether you have healthy ratios is to use industry benchmarking. Optimas Financial & Accounting Solutions can help you compare your financials to your industry standard. Call us today at 630-780-1042 or email email@example.com for more information.
About Optimas Financial & Accounting Solutions
Optimas Financial & Accounting Solutions’ (www.optimasllc.com) mission is to provide business leaders with the information they need and deserve. Optimas delivers cutting-edge accounting services and professional financial analysis and advice to small and mid-sized businesses, turning their accounting and finance departments into profit centers. We offer business accounting and CFO services using the latest technology and economies of scale to lower costs and increase the quality, amount, and timeliness of valuable financial information. Our CFO services also provide the expert financial analysis and insight to accomplish each client’s strategic objectives and increase their profitability.
© Optimas Financial & Accounting Solutions
Visit our Learning Center for more information on the following topics: