Converting accounts receivable into cash is a critical process in the development of a healthy cash flow. While booking a receivable is accomplished by a simple accounting transaction, the process of maintaining and collecting payments from your customers requires a steadfast commitment to a systematic process of Accounts Receivable Management.
To more effectively convert accounts receivable into cash it's essential that the credit and collection process be highly efficient in order for you to shorten the accounts receivable cycle time.
There are many companies available that provide the best account receivables management systems to manage your debts.
Image Source: Google
The accounts receivable cycle starts with a sale (credit sales) which in turn creates a receivable (monies due to your company), and then, ultimately converts into cash.
The length of time that it takes your company to complete this cycle, from sale to accounts receivable to cash, is the collection period. The shorter the collection period, the less time cash (capital) is tied up in the business process, and thus the better for your company's cash flow.
Try to limit outstanding accounts receivable to no more than 10 to 15 days beyond your credit terms. If your credit terms are net 30 days, then the collection period should not extend beyond 45 days. Keep in mind that average collection periods do vary because of industry standards, company policies, or the financial conditions of the customer.
