Changes in the Estonian Value Added Tax
November 30, 2023Updating invoicing guidelines in Sweden
December 12, 2023Strengthen Accounts Receivable Turnover to Boost Cashflow for UK Businesses
For many firms across the United Kingdom, maintaining efficient accounts receivable turnover is vital to ensure healthy liquidity through timely conversion of outstanding invoices and debts into cash in hand.
Also referred to as debtors turnover ratio or receivables turnover ratio, this essential metric provides key insights into how swiftly your firm collects payments owed by clients as well as robustness of credit control procedures.
Low or deteriorating accounts receivable turnover points to delays in getting paid, capital trapped in unpaid invoices, and heightened risks of defaults - requiring prompt intervention.
As specialists supporting accounts receivable management, EFF partners with enterprises across sectors to analyse their invoicing cycles and provide customised solutions to accelerate collections, minimise long overdue accounts, reduce bad debts, and ultimately enhance working capital velocity.
What Constitutes Good Receivables Turnover for UK Firms?
While accounting guidelines suggest accounts receivable turnover between 12-15 is optimal, implying roughly a 30 day average collection duration, acceptable ratios vary significantly across industries depending on business models and client contracts.
For example, while retailers may aim for turnover greater than 30 due to focus on cash sales, construction firms tend to have much lower ratios considering extended project timelines. For B2B services, 15-25 may be reasonable assuming 30-60 days payment terms.
At EFF, our priority is first understanding operating dynamics of your sector and current baselines before setting relevant goals. With experience across 100+ industries, our consultants establish profiles tailored to your specifics.
Calculations Behind Accounts Receivable Turnover Ratio
The accounts receivable turnover / debtor turnover formula seems simple:
Net Credit Sales / Average Accounts Receivable
However, digging deeper:
- Credit Sales: This refers specifically to yearly revenues from products or services sold on credit terms to trade debtors, not overall revenues
- Trade Receivables: Total outstanding credits owed by customers at any point, excluding bad debt provisions or statutory deductions
- Average will equal (Opening Trade Receivables + Closing Trade Receivables Balance) / 2
As a quick example, say total 2022 credit sales for Company X amounted to £2.5 million.
They started 2022 with £125,000 receivables on books and ended with £200,000.
Their turnover ratio is = £2.5m / (£125K + £200K)/2 = 12 times
This implies their customers take approximately 30 days on average to pay invoices.
How Tracking Turnover Metrics Helps UK Enterprises
Monitoring accounts receivable turnover as well trends over time allows executives to:
Highlight Early Warning Signs - A declining ratio could indicate impending troubles with collections well before liquidity suffers, prompting proactive policy changes
Benchmark vs Industry Peers - Compare turnover ratios against competitors in your niche. Materially lower figures demand supply chain analysis.
Evaluate Working Capital Health - Improving turnover directly enhances working capital availability for growth plans through freeing up of cash.
Measure Credit Control Efficacy - The magnitude and trajectory of ratios reflects effectiveness of credit risk and collections teams and procedures.
Enhance Investor Communications - Key metric demonstrating the reliability of a firm's clientele and ability to convert sales to cash.
International Best Practices to Improve Accounts Receivable Performance
Whilst best practices to enhance accounts receivable performance vary considerably based on market contexts, commonly embraced strategies include:
- Credit Risk Frameworks Aligned to Appetite
Develop clearly defined credit policies reflecting risk appetite. Assess counterparty exposure ahead of contract signing.
- Process Automation for Collections
Leverage relevant technology - SMS, email, call reminders, virtual assistants etc based on customer segments to accelerate post-sale payments.
- Incentives for Early Repayment
Where feasible, offer discounts or rewards for customers who pay invoices before due dates - improving short term cash flows.
- Rigorous Cash Application Processes
Efficiently allocate payments received to relevant invoices. Avoid unapplied balances clouding visibility into outstanding receivables.
- Specialised Credit Control Teams
Designate focused in-house or outsourced teams who specialise in managing complete downstream collections - avoiding distraction for salespersons.
- Late Payment Legislation as Backstop
Invoke Late Payment of Commercial Debts (Interest) Act 1998 (amended via 2002/2013 statutes) allowing businesses to claim interest and debt recovery costs where appropriate.
How EFF's Experts Can Optimise Your Accounts Receivable Cycles
Leveraging decades of collective experience supporting cashflow management for enterprises across sectors, EFF has the proficiency to tighten your accounts receivable cycles for accelerated cash collection.
Our suite of managed services includes:
- Evaluating your accounts receivable ratios against industry benchmarks
- Conducting working capital analysis to identify bottlenecks
- Providing complete outsourced AR management or supplementary capability
- Designing technology-enabled invoicing and collections workflows
- Consulting on template credit policies, risk-based customer tiers and billing processes to improve receivable turnover
- Preparing insightful management reports highlighting areas for enhancement
- Applying the latest fintech innovations where relevant while ensuring human touch
EFF consultants become your trusted advisors, taking a metrics-driven approach to significantly strengthen the linkage between sales and cash - ensuring stability and growth.
Frequently Asked Questions on Accounts Receivable Performance
What is a healthy receivables turnover ratio?
For most sectors, accounting guidelines suggest accounts receivable turnover between 12-15 is optimal - implying approx. 30 days to collect payments on average. Less than 10 indicates delays, while over 20 means very fast realisation.
How do you calculate average receivables
Average receivables equals sum of opening & closing net trade receivables for fiscal year divided by two. This smooths seasonal fluctuations allowing consistent analysis of debt collection effectiveness over annual business cycles.
What does the trade receivables turnover ratio indicate?
This vital metric shows the efficiency in converting credit sales to cash over a 12 month period. A high and consistent ratio indicates a well functioning pre & post sales processes.
What is a good DSO (Days Sales Outstanding)
DSO represents the average number of days to collect on outstanding invoices. While benchmarks vary among industries, 30-45 DSO is often seen as reasonable for B2B services, for instance. DSO ties closely to the accounts receivable turnover covered here.
Can late payment interest be claimed
Yes, under certain circumstances, UK law allows recovering interest on overdue B2B commercial debts. The "Late Payment of Commercial Debts (Interest) Act" sets guidelines creditors can leverage to motivate timely payment.
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Alcohol
Draft beer
Services like hairdressing
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Essential foods
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Medicines
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Books, currently taxed at 10%, will be exempt from VAT.
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Author: Klaudia Rydz, Senior VAT Compliance Specialist at EFF