Quick Cash Flow Fix: The Accounts Receivable Routine

Why This Routine Matters

The number one reason small businesses fail is a lack of cash, not a lack of profit.

This routine gives you a precise measure of how fast your sales turn into usable cash.

If you wait 60 days to get paid on a Net 30 invoice, you are acting as a free bank for your customers, starving your own business of working capital.

This simple, quarterly routine helps you stop the leak and put money back in your pocket.

Monitoring Frequency

Quarterly: Perform this routine in the first 1-2 weeks after the end of the quarter.
Monthly (Recommended): For businesses with very tight cash flow, move this routine to a monthly cycle for faster diagnosis.

Accounts Receivable Turnover Ratio (ART)

This ratio measures your effectiveness in collecting money from customers who bought on credit.

Step 1: Calculate Your Days Sales Outstanding (DSO)

The raw “Turnover” number is confusing. We use it to calculate a clear, actionable number: Days Sales Outstanding (DSO).

DSO tells you the average number of days it takes you to get paid after you make a credit sale.

A. Find the Inputs

Net Credit Sales: Total revenue from customers who bought on credit (invoiced) during the quarter. (Found on your Income Statement).
Average Accounts Receivable (A/R): The average amount of money owed to you during the quarter. (Found on your Balance Sheet).
$\text{Average A/R} = \frac{\text{A/R at Quarter Start} + \text{A/R at Quarter End}}{2}$

B. Calculation

Calculate ART: Divide your quarterly sales by your average A/R.
$\text{ART} = \frac{\text{Net Credit Sales}}{\text{Average Accounts Receivable}}$
Example: $100,000 in Sales / $20,000 Average A/R = 5.0.
Calculate DSO: Convert the ART into days.
$\text{DSO} = \frac{365 \text{ Days}}{\text{ART}}$
Example: $365 / 5.0 = 73 Days. In this example, you are taking an average of 73 days to get paid.

Step 2: Interpretation and Trend Analysis

Result & Interpretation	Action Trigger	Trend Analysis
DSO is Below Payment Terms (GOOD): Example: DSO is 30 days, and your terms are Net 45.	Maintain: Your collection process is highly efficient.	Look for a Falling DSO. This is a Positive Trend—you are collecting cash faster.
DSO Exceeds Payment Terms (WARNING): Example: DSO is 73 days, but your standard term is Net 30.	Immediate Action Required: Cash is being tied up unnecessarily. This is a severe cash flow drag.	Look for a Rising DSO. This is a Negative Trend—you are taking longer and longer to collect your money.

Step 3: Remedial Actions (Fixing the Cash Leak)

If your DSO is rising or is significantly higher than your payment terms (e.g., DSO 73 days on Net 30 terms), implement one or more of these remedial actions immediately:

Tighten Invoicing/Follow-Up:
- Action: Dedicate 1 hour per week (a Sprint Task) to personally call every client whose invoice is 15 days past due. A personal call works far better than an automated email.
- Action: Ensure invoices are sent immediately upon service completion, not at the end of the week or month.
Adjust Payment Terms and Incentives:
- Action: Offer a small discount (e.g., 2-3%) for payment within 7 or 10 days (e.g., “2/10 Net 30”).
- Action: For new clients, require a deposit or move to a partial payment schedule throughout the project/service delivery.
Use a Collections Service (Last Resort):
- Action: If an invoice is 90 days past due, it is generally time to send it to a collection agency. The cost is high, but waiting longer often results in losing 100% of the money.

Turn this into a Routine

We want to make this a regular Routine for your business in order to ensure your financials stay healthy.

This sort of Routine lends itself to a simple spreadsheet so you can;

calculate the results for the selected period
see at a glance if the results are improving or worsening over time
take any remedial action required and monitor if that works

If you are familiar with spreadsheets, you can automatically insert so-called ‘Traffic lights” by colour coding Bad (red), Watch (yellow) and OK (green) to instantly catch your attention if results change. See our template spreadsheet that does all this

This article was provided by Scott Williams AO FAIDC. It describes the way best practice in many management areas has been brought together in the 12Faces GamePlan System. The Goal is to provide an easy to use and repeatable “flywheel” to improve small business owners’ outcomes. Scott is the Founder of NFP small business support services 12Faces and MentorSME and has a Philanthropic Foundation supporting students in education. Scott’s business Petals Network was National Small Business of the Year and 4 times in the Top 100 Fastest Growing Australian Businesses LinkedIn