Our How-To article about maintaining your cash flow delivers the essentials for making sure you have sufficient cash available to pay bills. Memorize its message on the importance of keeping your accounts receivable (AR) as low as possible.
But AR is more than just a tally of what people owe you. It’s also a gauge of how much your clients like you. If they value your services and want to keep you working for them, they’re more likely to pay your bill. The reverse also is true: If they care little for you, your invoice might linger in the pile of bills longer than those of more vital vendors.
A great way to monitor your popularity is to regularly calculate what’s called AR Turnover—a measure of how many days it takes on average for the money due you to land in your account.
AR Turnover is based on the current outstanding dollars in AR as a percentage of annualized revenue. Here’s how to figure it:
- Tally your revenue year to date. For example, let’s say that through April your company booked $650,000 in revenue.
- Divide by the number of months you’ve gone through. Finishing April would mark four months, so $650,000 ÷ 4 = $162,500.
- Multiply that per-month figure by 12 months. $162,500 x 12 = $1,950,000.
- Next, write down the amount that people owe you—your AR. For this example, let’s say AR totals $137,500.
- Divide the AR by your annualized revenue. $137,500 ÷ $1,950,000 = 0.07. That is, 7% of your annualized revenue is outstanding.
- To get your AR Turnover: 0.07 x 365 = 26 AR Turnover days.
This remodeler must wait 26 days from the day the payment is due until the check actually arrives.
Do this calculation regularly—at least once a quarter, and certainly once a year. If the number goes down, people are paying you more quickly. Great! If AR Turnover rises, then it’s taking you longer to get paid and you may have a reputation problem as well.
Most remodelers establish a five- to seven-day payment provision in their contracts … and they expect their clients to meet it. Be proactive in managing AR and your cash flow automatically improves. Remember: Cash is king!