The average accounts receivable(AR) ratio indicates whether a business is able to collect its dues efficiently. It is also known as the debtors turnover ratio. A higher AR turnover ratio indicates that the business can collect its total receivables many times over in a particular period. It is calculated by dividing the net credit sales by the average AR during a particular time period.
Businesses can also calculate the average accounts receivable days (DSO) by dividing the number of days in the accounting period by the turnover ratio. Rather than looking at the AR ratio and DSO of a business in isolation, benchmarking it against the industry average provides a better perspective of the company’s collection strategies. A lower AR ratio compared to the industry average indicates poor collections and vice-versa.
Here is a list of the industry average accounts receivable turnover ratio and DSO for Q2 2022.
|Industry||AR turnover ratio||DSO (in days)|
The accounts receivable turnover ratio is a direct measure of a company’s ability to collect its past dues. In order to improve this ratio, you need to focus on the multiple sub-functions within your order-to-cash process.
Here are a few pointers to help you out.
The first step in the order-to-cash process is to send timely and well-documented invoices that clearly mention all the payment terms. It ensures there is clarity on when the customer needs to clear their dues.
Businesses can make it easier for customers to pay by offering multiple payment options like checks, e-payments, and ACH. Embedding payment links in dunning emails also supports faster collections. These measures help ensure there is very little friction in the payment process.
A proactive collection process helps businesses identify at-risk customers and reach out to them based on priority. This ensures that there are fewer delinquent accounts and that bad debt is minimized.
You can increase the chances of quicker payments by offering early payment discounts. For example, businesses can offer a 2% discount if customers pay within 10 days. If you want customers to pay upfront, you can offer higher discounts to those who pay in cash when the product/service is delivered or on a date prior to it.
Automating the e-invoicing and collections process is the key to maintaining healthy accounts receivable turnover ratio. Automation boosts collection speed and enables your business to recover AR 75% faster.
HighRadius RadiusOne e-invoicing and collections application help streamline invoice delivery and ensure that your customers always receive it on time. It also supports multiple payment methods and a self-service portal to offer customers a frictionless payment experience.
Our solution also offers prioritized worklists making it easier for collectors to target at-risk customers. It also provides insights using real-time data and reports on what next steps to take on each customer account to maximize cash recovery.
Reach out to our representative to know more about how our solutions enable you to achieve a higher AR turnover ratio.
Like DSO, the accounts receivable turnover ratio varies widely from industry to industry. For example, the industry average is 17.62 for retail and 9.98 for energy. However, the general rule of thumb is that the higher the AR ratio, the better.
The higher a business’s turnover ratio, the better it is for cash flow and day-to-day operations. It shows a company’s ability to collect its AR multiple times a year and indicates that customers pay on time.
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The HighRadius RadiusOne AR Suite is a complete accounts receivable’s solution designed for mid-sized businesses to put their order-to-cash on auto-pilot with AI-powered solutions. It leverages automation to fast-track key accounts receivable functions including eInvoicing & Collections, Cash Reconciliation, and Credit Risk Management powered by RadiusOne AR Apps to improve productivity, maximize working capital, and enable faster cash conversion. Affordable, quick to deploy, and functionality-rich: it is pre-loaded with industry-specific best-practices and ready-to-plug with popular ERPs such as NetSuite and Sage Intacct. The HighRadius RadiusOne AR Suite is designed to automate labor-intensive processes while streamlining credit and collections activities for faster AR processing, better cash flow and improved profitability.
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