Sageworks, a financial information company, recently conducted a financial statement analysis and found that of the many industries in which business operate, there are ten that typically have a harder time with rapid accounts receivable collection than others. Read below to learn which industries have historically high accounts receivable days and what exactly that means for businesses operating within them.
Seeing such high numbers like those above can be quite shocking, but they are not necessarily the end of the world for businesses in those industries. Of course, every company wants to reduce accounts receivable days as much as possible, but there are other factors at play here such as business models and industry averages.
For example, it could be pretty normal for accounts receivable days to reach 70 days in the construction industry. So if you’re right around that number, you’re in pretty good shape. If you’re much higher, then that could be a sign that you have a real invoice collection and cash flow problem.
BEST PRACTICES FOR REDUCING SLOW ACCOUNTS RECEIVABLE
KNOW YOUR METRICS
The first step in evaluating your company’s AR performance is knowing where you stand. The formula for accounts receivable days is (Accounts Receivable / Revenue) x Number of Days In Year. There are many other accounts receivable metrics to measure and track, so never let this be the only indication of the health of your invoice collection process.
COMPARE YOUR METRICS
Once you know your accounts receivable days, it is essential to compare it to your peers and industry averages. If you’re right in line with your peers or lower, that’s good news. If you’re higher, then you know there is some work to be done to reduce your accounts receivable days.
MAKE A PLAN
Once you understand where you stand in comparison to your peers, it may be time to start making adjustments to your invoice collection strategy to reduce accounts receivable days. You’d be surprised at how just a few simple changes can make a big impact. For example:
Finding ways to get your invoices to customers faster, such as electronic invoicing instead of snail mail.
Calling customers after invoice delivery to ensure they did receive it and if there are any problems that might delay payment.
Sending monthly statements or emails to remind customers of upcoming invoice due dates.
Using a business credit application template before extending credit to any customer
HOW TO DEVELOP A CREDIT POLICY PLAN
Learn how to reduce outstanding accounts receivable by creating a stellar collections plan. Read the guide here.
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Agricultural industries are some of the most unique when it comes to accounts receivable. Majority of business occurs during three to four months, and then it will taper off as the season ends. The rest of the year is spent putting money back into the business to prepare for the next big boom. This can […]