Short-term debt obligations are an indispensable attribute of entrepreneurial activity. Quite often, customers have problems with the availability of liquid cash, and the goods have to be sold on credit. In addition, the provision of a loan is usually a kind of bonus to attract buyers.
Thus, the presence of receivables is quite common for the company. However, it must be at a controlled level, otherwise the company will simply provide free loans to its customers, as well as experience a deficit in its own cash. That is why such an indicator as receivables turnover is quite significant. His analysis reveals whether the company abuses the issuance of commodity loans, as well as how effective its credit policy is.
The turnover of receivables is determined quite simply. To calculate the ratio, you need to divide the sales volume by the average receivables of your company for the year. This indicator will show you what percentage of the money that should have come to your account for the delivered goods or services rendered was issued in the form of a commodity loan to the company's customers.
Too low turnover of receivables is dangerous for two reasons. Firstly, in this way you part with your own capital, which could be used for other needs. Do not forget about the time value of money. Non-profitable funds, as in the case of a commodity loan, indicate lost profits, especially if the amount of receivables is large. You could use them for the development of the enterprise or just put them in the bank at a percentage.
In addition, funds frozen due to receivables could be used by enterprises for their own needs. Instead, the company sometimes has to take out loans, which means paying the corresponding interest to financial institutions, which directly indicates that the receivables are incurring losses to the company.
In addition, the sale of goods on credit is fraught with loss of funds due to write-offs of debts. The reasons can be very different: from bankruptcy of an enterprise to an elementary refusal to pay. Such bad debts are united by the item “doubtful accounts receivable”, on which write-offs occur regularly. Of course, the more loans you give and the longer the term, the greater the risk that you will not sufficiently check your debtor and provide a loan to a dubious company.
Thus, it is clear that the turnover of receivables should be maximized. If you do not want to lose customers who are not satisfied with the obligation to pay for a product or service immediately, you can enter a minimum purchase amount below which a loan is not issued. In addition to reducing the total number of debtors, you will also create an additional incentive for your customers to make bulk purchases. In addition, do not forget that it is the buyers who purchase small volumes that usually delay payments.
Accounts receivable can also be reduced by reducing the maximum period for which a commodity loan is issued. As a rule, customers pay on the very last day, so it makes no sense to indicate a payment term from 1 to 6 months. Two months will look much better. And do not forget that you must carefully monitor each debtor and work with each individually, only then you can maintain the state of your receivables at the optimal level.