Watch your receivables turnover ratio to keep your business healthy
This post is a guest submission from Manuel “Manny” Cosme, President and CEO of CFO Services Group, which provides accounting solutions for small and growing businesses. The views and opinions expressed in this article are those of the author and do not necessarily reflect the official opinions, policies, or positions of StreetShares or any of its affiliates.
Do you know when your next client or customer payment is coming in? Is it likely to arrive on time? If you can’t answer these simple questions, you may have cash flow troubles brewing – and no early warning system in place.
As a small business owner, you know the pain of waiting on a check that’s “in the mail.” Unpredictable cash inflow and outflow can create chaos and stress. (Not to mention panic on payroll day.) We encourage business owners to get a handle on your receivables turnover ratio as soon as possible, and to check it regularly. Understanding and managing your cash flow can help avoid ugly surprises and help you know when to ask for a small business loan or line of credit in advance.
What is a receivables turnover ratio?
The accounts receivable turnover ratio is a measure of how effective your business is at extending credit and collecting debt from your customers. It’s a cycle that starts when your customer purchases your product, and ends when your customer finally pays you. Everything that happens in-between is part of the collection process.
Your turnover ratio depends on your industry, and the types of clients you have. If you deal with large corporate clients or are a government contractor, then expect your accounts receivable turnover rate to be a lot slower (as corporations and the government are notorious for putting a lot of red tape into their payment processes). If you work in an industry where customers use you on a regular basis or you are considered a "critical vendor," then you should be getting payment a lot faster (since they wouldn't risk upsetting you). For more information about receivables turnover ratios, contact CFO Services Group.
Why do I need to track my receivables turnover ratio?
Understanding your accounts receivable ratio is invaluable for helping you manage your cash flow. Once you begin tracking how cash flows into your business, you can plan for outflows, too. Armed with knowledge, you can spot trouble areas ahead in your cash flow turnover and take action. You may see a need for a small business loan, line of credit or government contract financing, for example. Contact us to learn more about how to get a financing for your business.
Meet CFO Services Group’s Manuel “Manny” CosmeManuel “Manny” Cosme founded D.C-based CFO Services Group in 2012. In this role, he engages his more than 15 years of experience managing finances and administration as an accountant, business owner and entrepreneur. Early in his career, working in large and small companies – and for himself – Cosme witnessed that ongoing struggles with financial responsibilities often hold businesses back from their goals. He saw a solution and made it happen with the creation of CFO Services Group.
Cosme graduated summa cum laude from the School of Economics and Business Administration at Saint Mary's College in California, with a dual major in Accounting and Economics and a minor in Mathematics.