How can a company improve its accounts receivable turnover ratio?

Improving the accounts receivable turnover ratio is crucial for enhancing a company's cash flow and overall financial health. Tightening credit policies is an effective strategy to achieve this improvement. When a company tightens its credit policies, it becomes more selective about the customers to whom it extends credit. This means conducting thorough credit checks and only extending credit to those customers who have a history of timely payments and a lower risk of default.

By ensuring that credit is extended to customers who are more likely to pay promptly, the company can reduce the amount of accounts receivable that go unpaid or are collected slowly. This leads to faster collection times, thereby increasing the accounts receivable turnover ratio, which is calculated as revenue divided by average accounts receivable. A higher turnover ratio signifies that a company is more efficiently collecting its receivables, leading to improved liquidity and financial stability.

While lengthening payment terms might seem attractive for enticing customers to make purchases, it ultimately leads to slower cash inflows, which can negatively affect the turnover ratio. Increasing the credit limit may similarly encourage more sales initially, but it can also increase the risk of non-payment, further deteriorating the ratio. Lowering price points might boost sales volume but does not directly address the efficiency of collecting outstanding receiv