Many businesses focus their attention on getting as many new customers as possible to make sales. However, loyal customers are, in fact, the foundation of any booming business. For a business, faithful clients translate into repeat purchases and a host of other benefits. They’re also the most likely to promote your brand on social media as well as to friends and family. They also tend to report the highest levels of customer satisfaction, lowest levels of churn rate and can help boost the company’s net promoter score.

A customer retention program is a critical component in the success of any business. Yet, brands interested in creating a customer loyalty program or getting a deeper understanding of what makes their customers happy need to know how to measure the customer retention rate and customer churn rate. These two metrics often go together and help companies better understand the effectiveness of their customer service and subsequent customer satisfaction.

The customer churn rate indicates the speed at which clients stop doing business with a company. The rate is determined as a percentage of customers that currently exist and represents the percentage of customers who leave over time. While frequently looked at as a negative metric, the churn rate is a powerful tool for businesses looking to understand what’s working as it should, what isn’t, and what needs to be improved when it comes to the onboarding process and customer journey. The client churn rate can also help with marketing, social media, and various customer service programs. Similarly, the customer retention rate offers excellent insight into how to optimize a customer loyalty program and manage a healthy customer experience.

What Is The Customer Retention Rate?

The customer retention rate measures the number of customers that an organization continues to do business with over a set period. This customer retention metric is expressed as a percentage of a company’s current customer base that has remained loyal during that time frame. Retention is the opposite of churn rate and is critical to understanding the lifetime customer value. It’s also used in quantifying the efficacy of the brand’s marketing initiatives, customer service KPIs, and the overall customer retention plan.

The reason why all of these metrics above are so important because it’s far less expensive to retain your current customers than it is to only focus on customer acquisitions, month after month.

How to Calculate Customer Retention Rate?

To determine the retention rate, companies need to have a predetermined period of time they want to measure. Once it has that, they need to get the following data:

• S = The number of original customers at the start of the period
• E = The total number of customers at the end of the period
• N = The total number of new customer added during the time frame

This data helps measure customer retention and get a precise measure of customer loyalty and churn. Some companies will evaluate this data on a weekly, monthly, quarterly, or annual basis.

Customer Retention Rate Formula

Businesses need to use the following formula to calculate the actual customer retention rate:

[(E – N) / S] * 100 = X

So, for example, if your company starts with 200 initial customers (S), added 30 new customers over the period (N), lost 20 customers, and ended up with 210 customers at the end of the time period (E), you will have a customer retention rate of 90%.

Basically, [(210-30)/200]*100 = 90%.

The ideal rate is 100%, which means that you didn’t lose a single client. However, that’s not a realistic benchmark in most situations. The aim is to be over 85% for your company to remain strong and scalable. While it may still seem high, an 85% retention rate is average, as far as small businesses are concerned.

How To Improve Your Customer Retention Rate

Those looking to improve their customer retention efforts, slow down their user churn rate, and reduce their customer acquisition costs will need to get a handle on their retention rates. To do so, business owners will need to follow these steps:

1. Setting realistic expectations – One of the major factors that improve retention rates is the correlation between their expectation and actual customer experience. If you make promises that you are unable to keep, you’re unlikely to see repeat purchases.
2. Implementing anticipatory services – By sending your customers reminders for upcoming invoices or subscription renewals, it shows that you’re on top of things.
3. Leveraging social media – Interacting one-on-one with every client on social media or email will help build healthy customer relationships, loyalty, and retention.
4. Solicit feedback from customers – Customer feedback surveys are a great way of gauging customer experience. If multiple prospective clients mention company issues or shortcomings, addressing the problems can significantly boost customer retention rates.

The Customer Churn Rate

As mentioned earlier, the customer churn rate (CCR) represents the ratio between acquired customers and lost soon afterward. The churn and retention rates are like two sides of the same coin. The churn represents clients lost, while retention represents clients retained. A low CCR is indicative of happy customers and increased levels of loyalty.

One way of calculating the user churn rate is by subtracting your retention rate from 100 percent. Alternatively, the CCR can be determined by dividing the customer loss by the number of the original customers at the start of a given time period. You then multiply that value by 100.

The Customer Lifetime Value

As far as retention metrics go, the customer lifetime value (CLV) is among the most important but also among the most confusing to calculate. The CLV indicates the health of your business in terms of how much customers end up spending during their lifecycle. When customer loyalty is high, they tend to spend more, yielding a greater lifetime value.

To calculate the CLV, you need to multiply the amount of money the average customer spends per year by the average customer lifespan. This will give you a value in terms of how much revenue you should expect from the average customer over their lifecycle.

The Repeat Customer Rate

Loyal customers are the ones making multiple purchases. As such, the repeat customer rate would be a great measure of customer loyalty. The repeat customer rate is a percentage of the current customer base that has made more than the initial purchase. To calculate it, you divide the number of repeat clients over a period of time by the total number of clients and multiply by 100. While repeat purchase doesn’t automatically indicate loyalty, the likelihood that a customer becomes loyal grows with every additional purchase.

The Upselling Ratio

The most faithful clients are also the most receptive to your products, aside from those that they already intend to buy. For example, suppose a customer is browsing for a specific item and ends up buying that item alongside another item from a different product category. In that case, there’s a strong indication that the customer is loyal to your brand.

The upselling ratio is about measuring the percentage of clients who added unrelated products to their orders instead of those who bought a single product. The formula is the number of clients who made multi-item purchases divided by the number of clients who made single-item purchases.

The Product Return Rate

Many eCommerce businesses use the product return rate as an indicator for the quality of products and the customer service they have to offer. If the product generates customer success, the product return rate is low, which indicates that the product quality is high.

Time Between Purchase

This purchase frequency KPI can determine how much demand there is for their product in relation to their repeat customers. It also indicates how much value they provide as well as how good your customer service is.

Shopping Cart Abandonment Rate

This metric indicates a point of friction when customers have already said yes, they are willing to make a purchase, but for some reason, they can’t or won’t. For instance, a confirmation screen isn’t loading, their transaction isn’t completing, there aren’t enough payment options, and other customer experience issues.

Takeaway

Building and maintaining a robust customer retention strategy will require a fair degree of planning. When it comes to improving your customer retention rates and developing the right programs and strategies to make it happen, organizations need to focus on detailed business analysis to understand which metrics to follow and how to calculate them. Consero offers a financial solution, intuitive systems, and the expert support necessary to help you better understand your company from every angle. Request your free demo today!

The main priority for salespeople, regardless of the type of business or industry, is to constantly find new and effective ways of increasing revenue. At first glance, the most straightforward approach is to sell more, which, in many cases, means getting new clients. As a consequence, salespeople often find themselves focusing too much on gaining new clients and completely neglecting to address the need to retain the ones they already have.

However, it’s well-known that it’s much cheaper for companies to keep their existing clients than acquire new ones. Statistically speaking, selling to existing customers has a 60 to 70% success rate. Selling to a new customer, on the other hand, is only around 5 to 20%. Also, The Harvard Business Review shows that improving customer retention rates by as little as 5% will increase business profits by 20 to 95%. These figures beg the question of why so many businesses focus so much time, energy, and resources on getting new customers at the expense of neglecting current customers.

Customer Retention vs. Customer Acquisition

The most common misconception among organizations is that if they create a great product or service, customer retention will be a given. And while the quality of the product or service does impact customer satisfaction and retention, it’s only a short-term solution. It’s not uncommon that, sooner or later, clients may leave, feeling that you no longer care about them.

In the end, customer loyalty is not something that, once given, can never be taken away. It’s something that companies need to earn on a continuous basis. For this, they require an effective customer retention strategy that gives them the ability to identify, track, and sell more to those clients who are likely to become long-term sources of revenue.

Why are Customers Leaving, in the First Place?

Customers will stop buying from a particular business for a wide range of personal and unique reasons. That said, many of these reasons can be summed up into several categories. When it comes to customer churn, three main areas seem to drive customers away. These include the following:

1. Customer Experience – One of the major factors that significantly influence customer churn is the experience clients have when interacting with the organization. A bad customer experience, especially if it falls well beneath the customer expectations, will greatly increase the chances that the client will leave. Similarly, limited access to customer support can also cause clients to become angry and frustrated.
2. Incentives – While price is an essential factor that influences customer attrition, people are willing to remain if they receive fair treatment. However, if a competitor promises various incentives in the form of a better experience at a lower price point, they are able to acquire new customers.
3. Human Services – Whenever customers have an issue with the company, they want to speak with a natural person. Looking for answers on a website or interacting with a bot often fails to address the client’s unique needs. As a result, they begin feeling unlistened to or offer solutions that don’t solve their problems.

The bottom line is that regardless of the price clients initially paid when they signed up, they will leave for the competition if their overall customer experience lacks incentives or a more personal relationship in the form of human touch.

Proven Customer Retention Strategies

At its core, customer retention refers to any actions undertaken by the company to build and maintain strong customer relationships. Put somewhat differently, retention is the science of making sure that clients are satisfied and will return to spend more money on its products or services. Below is a list of customer retention tips, programs, and strategies that can help ensure happy customers.

The Onboarding Process

An onboarding process aims to aid with customer success by teaching them how to use your product or service. Rather than learning everything by themselves, users are guided by a customer representative who offers a personalized experience according to individual needs. In doing so, customers will save time and understand how the product can help them achieve their goals faster and more effectively.

Onboarding is often seen as a successful customer retention tool because it limits the churn rate of new customers. During the initial phases of learning how to use a new product, people can become easily frustrated if they don’t understand how to use it. The onboarding process ensures that customers know how to utilize the product so they can achieve their goals as fast as possible.

The Customer Feedback Loop

Business owners will find it incredibly difficult to improve their companies if they don’t know how their customers feel. For this reason, they need to find effective ways of obtaining customer feedback and share that data with the rest of the organization. The customer feedback loop provides a system for collecting, analyzing, and distributing customer reviews and surveys.

Customer surveys are one of the most common ways of collecting feedback. User testing and focus groups are also tools used in this strategy. By using these methods regularly, your team should be able to gather enough relevant customer feedback. Once collected, the survey results should be analyzed and used to understand and anticipate trends in customer behavior and determine areas to enhance the experience, more in line with customer expectations.

The Customer Loyalty Program

As the case with sales staff focusing too much on customer acquisition, another potential pitfall is about focusing too much on customers at risk of churn. Companies should ignore their loyal customers at their own peril. A customer loyalty program will reward premium customers for their continued loyalty. The more they spend and interact with the brand throughout their customer lifecycle, the more they’re rewarded. It keeps customers happy because they’re getting additional incentives aside from just the product or service.

The Communication Calendar

Even if you’re dealing with inactive customers, communication is always vital. Even if clients haven’t interacted with the brand for a while, businesses should still look to re-establish a connection and reaffirm their relationship. A communication calendar will come in handy as it helps manage customer engagements and create upselling and cross-selling opportunities.

A communication calendar is a chart that keeps track of all customer communications. It informs about the last time clients have reached out and alerts teams about when existing customers haven’t interacted with a brand. There are many uses for this calendar, such as launching various promotional offers or taking a more proactive approach to customer service. For example, if a user’s subscription is about to expire, companies can send out an email letting them know they need to renew their account. This helps remove this particular roadblock before the client gets there, helping improve the customer service experience.

The Customer Advisory Board

Aside from being among the biggest spenders throughout the customer lifetime, loyal clients also provide critical information to the organization. They let them know what they like about the company and make suggestions on how to improve it. By putting together a panel of loyal customers that can help fine-tune products and services. Besides, they can be encouraged to become brand advocates by sharing their reviews. Social proof in the form of customer reviews and testimonials is an effective tool in building rapport when attracting and engaging with prospective customers.

The Social Responsibility Program

Due to the proliferation of social media and the digital environment, as a whole, today’s consumers are more involved and informed than ever. Therefore, brands need to get involved with their clients beyond just their products. A corporate Social Responsibility program pursues a moral goal aligned with the customer base’s core values. Lego, for example, has been making significant investments into making its products more environmentally friendly. While not all companies need to have such ambitious projects, they can still get involved in their customer base’s community and demonstrate a commitment to their needs and values.

Takeaway

Different customer retention strategies can be used together to create an exceptional customer experience that can cultivate loyalty and make clients more willing to make purchases. Through customer retention, brands can derive more value from their product, encourage satisfied customers to become brand advocates and influence others to become new customers.

When it comes to improving customer retention rates and developing the right strategies for making it happen, brands need to rely on detailed business analysis and know which metrics they need to follow and how to calculate them. Consero Global offers a financial solution (including expert support and intuitive systems) that can help you better understand your business from every angle and achieve the desired results in a fraction of the time.

As time goes on, customer retention seems to become increasingly complicated. With the proliferation of consumer options, companies need to constantly adapt and find innovative ways of keeping their customers close. The importance of customer retention has never been more evident than it is today.

Put simply, customer retention is about businesses trying to keep their customer base for the longest time possible so that they can spend more over the customer lifetime. A customer retention program is, after all, about focusing on loyal customers instead of just recruiting first-time customers. The latter falls under what’s known as customer acquisition. However, it takes more than just acquisition to grow a business on a sustainable level. Without building and maintaining customer loyalty, companies are expected to stagnate and, eventually, fail.

That said, keeping customers happy consistently doesn’t happen by accident or overnight. While the acquisition is easy to see and measure, the customer retention metrics are not as straightforward and may require some time before it’s noticeable.

The Importance of Customer Retention By the Numbers

Studies are pretty conclusive when it comes to the efficacy of customer retention strategies. For starters, a Harvard Business Review study has discovered that increasing customer rates by as much as 5% can increase profits by 25% to 95%. Other studies have shown that acquiring a new customer can cost businesses between 5 and 25 times more expensive than retaining an old one. Also, the success rate of selling to current customers is between 60% to 70%. Yet, the success rate is only at around 5% to 20% when it comes to new clients.

In terms of retention marketing opportunities, loyal customers have a purchase frequency that’s five times higher than new customers. They were also five times more likely to forgive their unfulfilled customer expectations, four times more inclined to refer the company, and seven times as likely to try a new product or service. That said, it was also found that around a third of clients will consider switching companies after a single instance of poor customer service. On average, U.S. companies lose about $136.8 billion per year because unhappy customers switched to their competition.

Put simply; an effective customer retention plan costs less than focusing solely on acquisition. As mentioned, return customers are also more likely to engage in word of mouth advertising, acting as the company’s advocates, free of charge. Also, referred clients tend to have a higher customer lifetime value than those acquired through conventional means.

What Influences Customer Retention?

The exact percentage of customers that remain loyal to brands can vary quite significantly. These differences can depend on each industry, but several factors can be found throughout most of the business sector. Among these, we can include the following “gold standards”:

Customer Satisfaction

One significant indicator of customer satisfaction is the relationship between customer expectations and user experiences. If the experience matches the expectation, satisfaction is assured. If, however, the expectation is higher than the quality of the customer experience, you’re dealing with an unhappy customer, and retention rates drop.

That said, the correlation between satisfaction and retention is not always as straightforward as that. Depending on the circumstances and some industries, other factors may influence the customer base to remain with the company over the long term. That said, by measuring customer satisfaction on an ongoing basis, organizations can adjust their customer retention strategy and stay in line with their business goals.

Customer Success

The scope of many products and services is to address the essential needs and pain points of customers. By extension, your customer’s success is directly tied to yours. If they can realize their goals by using your products and services, they will likely stay with your brand for the long term. Your business will be able to generate revenue throughout the entire duration of your customer relationships. There are some industries out there where customer success will take precedence over their satisfaction.

Customer Reliance

Another driver of customer retention is reliance. Namely, this refers to how much do your clients rely on your products and/or services for their daily operations. The more clients rely on you, the harder it will be for them to leave or switch to your competitors without incurring significant losses or downtime. The longer companies provide excellent services to their product users, the more dependent these become on their vendors. Therefore, dependency can have a considerable impact on both retention and revenue.

Difficulty Changing Vendors

Some businesses also try keeping clients bound to their brand through contract exit clauses. The more difficult it is for clients to leave, the less likely they are to switch to other providers throughout the contract’s duration. Going the extra mile by offering strong incentives,  you can also prolong the contract, making it even more difficult for clients to leave once the current contract is up.

Why Customer Retention Is Key To Business Success

Regardless of the benefits mentioned above, many organizations are not aware of the importance of retention, focusing instead on the acquisition and, frequently leaving their loyal customers unsatisfied. Current customers and their long-term retention help increase business profitability in many different ways.

• Identifying referral sales opportunities – Satisfied customers are more likely to tell their friends and family about your brand. It would be best if you made it easy for them to give you a referral by implementing a system that rewards them whenever they do so. Once you receive these leads, explore them even further and determine if there are any new clients that you can earn.
• Fostering a constructive long-term relationship – Everyone, your clients included, wants to be treated with respect. This is, in a sense, the backbone of customer retention. The way you manage to build your relationships will also dictate how your company will move forward. By creating a comprehensive customer loyalty program and generally taking advantage of other such tools and strategies, companies can ensure that they’re headed in a constructive direction.
• Rectifying flaws with policies and procedures – Loyal clients are among the best sources of information on how to improve your company’s policies and procedures. Unlike unhappy clients, who might vent their frustrations in angry customer reviews, loyal customers will let you know about your company’s problems and shortcomings, hoping that you will improve it for the benefit of everyone involved. By listening to this customer feedback, you will stand to gain in terms of both retention and acquisition.
• Enhancing your brand reputation – Companies that provide the highest levels of customer service and invest in retention strategies also experience a solid brand reputation. The quality of the care supplied will frequently turn clients into brand evangelists. So, just by focusing on customer retention, companies are making considerable investments in brand reputation as well.
• Understanding future trends and customer needs – One of the best ways of anticipating trends and understanding clients’ future needs is by working together with them to keep them around as long as possible. As a general rule of thumb, for every customer complaint you come across, there are at least ten others that you will never find out directly from them. This is why it’s so important to listen to your clients whenever they bring up things and issues, as they will help you understand the wants, needs, and pain points of future customers. Alongside listening to them, you can also monitor user engagement over time. All of this will tell you what customers are thinking and where they want you to go.

While customer loyalty is harder to come by in today’s digital age, it’s more important than ever to invest your time, energy, and resources in customer retention strategies. The importance of retention is not about keeping an extra customer or two around, but about treating your customers the way they should be treated, in the first place.

When it comes to improving your customer retention rates and developing the right programs and strategies to make it happen, organizations need to focus on detailed business analysis to understand which metrics to follow and how to calculate them. Consero offers a financial solution, intuitive systems, and the expert support necessary to help you better understand your company from every angle. Request your free demo today!

With more options than ever before, companies need to constantly adapt and change their tactics to keep their clients close. Customer retention has become more important than ever before. Simply put, customer retention is helping businesses that try to maintain their customer base for the longest period of time as possible. In the meantime, clients can spend more over their own individual customer lifetime.

Instead of relying solely on recruiting first-time customers, which is the purpose of customer acquisition, a customer retention program is about focusing on loyal customers. It’s about turning existing customers into repeat customers who will continue to purchase from your organization instead of your competitors. A customer retention strategy typically focuses on building and maintaining brand loyalty, increasing customer satisfaction, and boosting customer relationships. When it boils down to it, customer retention helps a company boost its bottom line profits. Keeping customers happy on a consistent basis doesn’t happen accidentally or overnight. This guide will highlight the importance, the benefits, and the strategies to make the best use of customer retention in 2022.

Why Customer Retention is Important

Significant research has been done on the issue, and according to the Harvard Business Review, a slight increase of as little as 5% in customer rates will help increase profits by as much as 25% to 95%. It was also shown that customer acquisition could be between 5 and 25 times more expensive than retention. In addition, new customers are more challenging to sell to than current customers. Statistics show that sales to existing customers have a success rate of 60% to 70%, whereas new clients have between 5% to 20%.

In addition, loyal customers are also five times higher purchase frequency and are five times more likely to forgive their unfulfilled customer expectations. Similarly, they are seven times as likely to try out a new product or service and four times more inclined to refer the brand to their friends and family. Also, around a third of all clients were found to, at least, consider switching companies after a single instance of poor customer service. In the United States alone, over $136.8 billion per year worth of profits are lost because of unhappy customers moving over to the competition.

The Benefits of Customer Retention

While there are several benefits to why customer retention is essential to a business, there are three main ones that can significantly impact the company’s overall well-being.

• Referrals – Loyal customers who regularly purchase from the same company are more likely to post positive feedback and customer reviews online. In doing so, they will also provide you with free word-of-mouth advertising to their friends, family, and social network acquaintances.
• Cutting Costs – As mentioned earlier, it’s generally more expensive to obtain a new customer than to hold on to an existing one. Better customer retention leads to a decrease in resources spent on marketing and advertising.
• Revenue Increase – There’s a clear correlation between customer retention and customer lifetime value. This is one of the key metrics signifying the total amount of money expected to be earned from a customer throughout their entire relationship with the company. By increasing customer retention, brands also increase their customer lifetime value, which positively impacts the company’s profitability.

Deciding on how much to focus on customer retention programs depends mainly on where the company is in its lifecycle. Startups may want to focus on expanding their customer base, investing more into customer acquisition. More established companies with an existing customer base can benefit more by investing more of their resources in a customer retention management program.

What Influences Customer Retention?

There are significant differences between industries and types of business, which can also translate to the exact percentage of customers that remain loyal to brands. The most important factors influencing customer retention include the following:

• Customer Satisfaction – The correlation between customer expectations and experiences is a strong indicator of customer satisfaction. Higher expectations that the actual experience can lead to unhappy customers and lower retention rates.
• Customer Success – Since many products and services are specifically designed to address the needs and pain points of customers, your success is, therefore, tied to yours. The longer your product/service will help guarantee their success, it will increase their retention and also help you make more sales throughout the entire duration of their customer relationships.
• Customer Reliance – This factor indicates how much current clients rely on a company’s products for their daily operations. The more they rely on your company, the harder it will be for them to leave for the competition. Their dependence on your brand will have a significant impact on your retention and revenue.

Top Important Customer Retention Metrics

Before developing and implementing a comprehensive customer retention strategy, brands need to keep in mind several essential customer retention metrics. These include the following:

• The Customer Retention Rate – This is a key metric that measures the percent of customers that continue to do business with the brand over a specific time.
• The Customer Churn Rate – The customer churn rate metric measures the percentage of customers lost over a specific period.
• The Repeat Customer Rate – The percent of customers who made multiple purchases over a period of time. The higher the repeat customer rate, the better.

How to Calculate Customer Retention Rate

Calculating the customer retention rate is done by using the following formula:

[(E – N) / S] * 100 = X

In this customer retention formula, E stands for the number of customers at the end of a time period. N represents the number of new customers acquired during that same period of time, while S indicates the number of customers at the start of the time period taken into consideration.

So, for example, if you’re measuring the retention rate and start with 100 customers (S), get 40 new customers (N) but also lose 20 existing customers, that means that by the end of the time period in question, you end up with 120 customers (E). To determine the customer retention rate, you calculate

• (120-40)/100 = 0.8
• 8*100 = 80% – which represents the customer retention rate.

As a general rule of thumb, most businesses aim to achieve a retention rate of at least 85% or higher.

Strategies to Improve Customer Retention

Another way of framing retention is to look at it as an essential cog within its customer relationship management. This means that customer retention helps to ensure customer satisfaction and increase their return rates, therefore spending more money throughout their lifecycle. Below, we’ll be looking at several customer retention tips and strategies that can help ensure customer happiness.

Making It Easy For People To Contact You

When customers look to contact a brand, they typically want quick answers. The best way to approach the situation is to provide them with multiple channels to do so. This can include everything from phones to emails, social media, and live chat. However, the important thing is to make sure that whatever channels you use, you have a system in place capable of answering all customer requests as soon as possible. There’s nothing worse for your customer retention program than having a client reach out only to receive the silent treatment.

Transparency

As in personal relationships, business relationships thrive on trust. And to achieve a high level of trust, you will need to provide your clients with transparency. A brand that’s unwilling to disclose information may seem like it’s trying to hide something. So, for example, if you’re anticipating an ongoing issue, it’s far better to let your customers know about it in advance than have an unexpected lousy experience, second-guess your motivations, and ultimately leave because of it.

Quality Customer Service

Excellent customer service is the backbone of customer satisfaction and has a tremendous impact on customer retention. As mentioned earlier, a significant chunk of your customer base will be inclined to switch to your competition if they have a terrible experience resulting from poor customer service. A good way of showing your dedication is by being there and listening to their concerns. Frustrated clients want human interaction more than anything else. By offering them empathetic responses to their issues will help maintain your customer retention rate.However, if clients are greeted with automated responses straight out of a support script, the opposite effect may end up happening.

Client Education

To build trust with customers, plenty of companies use customer education as an effective retention marketing strategy. By sharing useful and valuable information, brands can guide prospective clients through their customer journey and help increase trust. This form of inbound marketing can be an excellent tool in a brand’s customer loyalty program.

The Onboarding Process

Similar to the point above, an onboarding process aims to provide clients with helpful information. The only difference here is that the onboarding process is strictly about teaching them how to use your product as efficiently as possible. In doing so, brands will help ensure customer success which, in turn, will have a strong influence on retention. An effective onboarding process also helps limit the customer churn rate, especially during the early phases of using a new product, when people can become easily frustrated with not knowing how to use it properly.

Personalized Customer Experience

Statistics show that 80% of consumers are more likely to do business with an organization if it offers a personalized experience. By adding a personal touch throughout all customer interactions, including email marketing and even product packaging, you can help achieve overall better customer retention rates.

Empowered Customers

Social proof in customer reviews and testimonials helps to improve and promote a brand’s credibility. Not only do they assist in providing authenticity, but they also can improve conversion rates. In addition, some 72% of consumers say that positive reviews and testimonials make them trust a business more. Several ways to achieve this are by encouraging customers to add reviews and testimonials to your site and product pages and share their experiences on social media.

Seeking Out Feedback

Among the most effective ways of understanding your product’s strengths and weaknesses is to speak directly to their users/your customers. They are essential in understanding the product as thoroughly as possible. By using this feedback to improve your product, you are essentially working on making your customers remain by your side over the long term. An effective way of gathering feedback is through customer surveys. Another way is by arranging a feedback session over the phone or in-person with a user that’s willing to help you out.

The Customer Advisory Board

Loyal customers are known as the biggest spenders throughout their lifetimes. But what’s generally less known about them is that they’re also an essential source of highly valuable information for the company. By putting together a panel of loyal customers, businesses can fine-tune their products and services. These clients can also be encouraged to become brand advocates and promote the brand on your behalf.

Incentives

Occasional sales, discounts, and coupon codes were also shown to have an impact on retention and help keep customers satisfied. Similarly, consumers will appreciate small gestures as much as they do perks, as these will appear to be more genuine and personalized. Sharing their stories on social media, organizing various contests, or even interviewing clients for your blogs are excellent and creative examples of incentivizing customers.

A Customer Loyalty Program

Another solid retention strategy is a customer loyalty program. Too often, the focus is placed too much on customers at risk of churn. Brands should never ignore their loyal customers, thinking that they will always remain as such. A rewards program will repay premium clients for their continued loyalty. Basically, the more they interact with your brand, the more they spend throughout their lifecycle, and the more they should be rewarded for it. This strategy helps keep customers happy because they’ll receive additional incentives than the ones mentioned above.

Focusing on Customer-Centricity

The entire team on your payroll must understand the customer as much as possible. Having a customer-oriented workforce will be highly beneficial for product production as well as marketing. By understanding the target audience, brands will create a type of product that will better address their needs and pain points, which will increase the likelihood of their success.

A Communication Calendar

Communication is essential for any type of relationship, personal or otherwise. Even if you’re dealing with inactive customers that haven’t interacted with your brand for a while, it’s still a worthwhile effort to try and re-establish a connection with them. A communication calendar is especially useful in keeping yourself organized when it comes to managing customer engagements.

A communication calendar is a chart that keeps track of all customer communications and interactions. It will let users know when was the last time clients made contact with the company and alerts team members about those that haven’t interacted with the brand within a given period of time. Such a calendar can also launch various promotional offers or take a more proactive approach to customer service.

Building a Corporate Social Responsibility Program

With the proliferation of the digital environment and social media, today’s consumers are more informed and involved than ever before. Brands looking to increase their customer retention rates will also need to get involved with their customers beyond just through their products. A Corporate Social Responsibility Program looks to pursue a moral goal aligned with the core values of its customer base and target audience. Companies, big and small, have employed such a responsibility program.

Lego, for example, is known for making significant investments into making its products more eco-friendly. Microsoft and Patagonia are also known for their many philanthropic projects. General Mills aims to reduce its greenhouse gas emissions by 28% by 2025, hotel and resort operator Hilton is known for its workplace diversity, and more. While not all companies need to embark on such ambitious projects, they can still get involved in their local community and demonstrate their commitment through smaller but equally important acts.

Takeaway

There are plenty of ways to improve customer retention, but there is no one-size-fits-all approach for all companies looking to employ it. Your product and the level of your customer service will help mod customer loyalty. Customer relationships need to be invested in and nurtured over time. And while customer loyalty is harder to come by in today’s day and age, it’s more important than ever to invest in customer retention measures aimed at improving your retention rates.

When it comes to developing the right programs and strategies to make it happen, brands need to focus on detailed business analysis to understand which metrics to follow and how to calculate them. Consero offers a financial solution, intuitive systems, and the expert support necessary to help you better understand your company from every angle. Request your free demo today!

The accounts receivable turnover (AR turnover) is a measure of a company’s effectiveness in collecting payments from its clients and customers. It is calculated using the accounts receivable turnover ratio (AR turnover ratio) and the receivable turnover ratio formula with the values of net sales (net credit sales) and the average accounts receivable. But once you calculate it, how can you know what is a good accounts receivable turnover? How can you assess your company’s performance from the activity ratio value?

In theory, a high turnover ratio is good, and a low turnover ratio is bad. However, in practice, not everything is that black and white.

To truly understand the meaning of your company’s receivables turnover ratio, you need to understand how it fits with the overall performance and how you can effectively compare with other businesses.

It is important to remember that the accounts receivable turnover is different from the asset turnover ratio. The asset ratio represents how well a company utilizes its assets to generate revenue. It has nothing to do with its credit practice or debt collection methods.

High Receivable Turnover

A high turnover rate is characterized by a higher ratio. It means that a company collects payments from its customers relatively quickly, without a long waiting period. A high-efficiency ratio means that the company has high-quality customers who pay their debts in due time. This business likely has little to no trouble managing its cash flow and supporting its advancement.

Businesses that run on a cash basis (for example, grocery stores,) have incredibly high turnovers. That is why the receivable turnover ratio is not a good indicator of the efficiency of their credit policies.

Furthermore, a high turnover doesn’t have to be a good thing. It can also mean that a company is too aggressive with its debt collection and that its credit policies are too strict. They might be losing customers to their competitors that have more favorable credit terms.

Low Receivable Turnover

A low turnover means a low turnover ratio. Manufacturing companies tend to have a low accounts receivables turnover ratio because it takes them a relatively long time to manufacture a product, ship it to their customers, and receive payment.

In theory, a low receivable ratio is a sign of bad debt collecting methods, poor credit policies, or customers that are not creditworthy or financially viable. A company with a low turnover should reassess its collection processes to ensure that all the receivables are paid on time.

If your company’s turnover is low compared to your competitors, it might not be a reflection of your credit policies at all. Perhaps a different part of your business is lacking. Such as your distribution system, for example. If it takes a long time for your product to reach your customers, that may lead to a longer-than-average time for them to pay.

How to Compare the Receivables Turnover Ratio

Comparing the ratios of two different businesses does not make much sense. If you put up an average grocery store against a car part manufacturer, you will get vastly different ratios that will likely lead you to the wrong conclusions.

For a fair assessment of the accounts receivable ratio, it is crucial to compare businesses with the same working capital structures, same payment terms, and within the same industries. Choose competitors that are roughly the same size and preferably have the same business models as your company. That way, you will get an accurate idea of your turnover ratio compared to the industry average.

How to Improve Your Receivables Turnover

If you find that your receivables turnover ratio is low compared to businesses similar to yours, there’s no reason to despair. There are ways to improve it, and here’s how you can do just that:

• Accurate and Regular Invoicing

Make sure that all of the invoices you send out are accurate and detailed. When everything is neatly laid out on paper, it will be much easier for your customers to understand what the bill says and what amount is required for them to pay.

If there is a set date for invoicing, don’t miss it. If there isn’t, send your bill the moment the work is completed or delivered. If you send in your invoices late, you risk setting a standard for late payments for your customers.

Furthermore, do not wait for the outstanding costs to pile up before you invoice a client. If more than a month passes between the finished work and the invoice, your customers have already mentally moved on. It is also more sensible for them to pay regular smaller bills than one large bill at the end of a quarter.

• Strong Customer Relationships

To maintain a high accounts receivables turnover, you need to have strong connections with your customers. Businesses of all sizes benefit from having good customer relationships because happy customers are happy to pay for your goods or services.

Check in with your most loyal consumers. Send them an email, give them a call, or possibly even offer them a discount or a special deal. They won’t risk damaging the relationship they have with your brand by not paying on time.

• Clear Payment Terms

When it’s time to collect your payment, you cannot hope to enforce policies or agreements you never disclosed to your customer. Therefore, you must be clear about the payment terms of your company upfront. Ensure that all communication with your customer (agreements, contracts, and invoices) state what their duties are in terms of payment.

A common restriction is giving a 30-day deadline for the payment (from the moment you send out the invoice). Don’t hesitate to include charges for late payments if your customers go over the 30-day limit. If you sell a product or service for a higher dollar value, you can implement payment plans or set credit limits that will work for you and your customer.

• Software Reminders

It’s impractical to have several different spreadsheets for invoices, outstanding payments, new orders or clients, and similar. Instead, it would be smart to invest in a software solution that will keep everything in one place. It will be easier for you to keep track of everything. You could also set up software reminders, not only reminders for yourself but also regular reminders for your customers that their payment is due.

You won’t have to worry about remembering whether you sent an invoice on time or whether the customer paid on time because your software solution will do everything for you!

• Simpler Billing Structure

A simpler billing structure can eliminate a lot of confusion and panic on the customer’s side. If it is at all possible for your business, try to switch to fixed-fee billing. This means that every month (or at agreed intervals), the customer pays a fixed price for your product or service. Fixed-free billing goes a long way in ensuring that you don’t get calls from customers wondering why their bill is higher than expected.

Additionally, with this billing structure, you could arrange to withdraw payments from your clients’ accounts every month automatically. You won’t have to send them an invoice and wait for them to pay, which should increase your receivable turnover rate.

Conclusion

The accounts receivable turnover is measured by a financial ratio predictably called the accounts receivable turnover ratio (also known as the debtors turnover ratio). In simple terms, a high account receivables ratio means that your business is doing well in payment collection, while a low ratio means you could improve some things.

However, there are some rules when comparing your ratio to those of your competitors. You need to choose businesses in the same industry as you, roughly the same size, and preferably employ the same business model. Only companies with similar or identical working capital structures can be effectively compared. It would be best to find the average receivable turnover for your sector and then evaluate where your company’s ratio stands in comparison to it.

If you find that your ratio is not up to par, there are ways you can increase it. Ensure that your invoicing practices are impeccable (that you’re not invoicing late), that you have strong relationships with your customers, and that they are clear on the payment terms and conditions before they sign any agreements or contracts. Furthermore, consider simplifying your billing structure (switching to fixed-fee billing) and perhaps finding a software solution that will remind you of your billing responsibilities.

Consero Global offers financial solutions for any business. Reach out to us if you’d like some help with your receivables management and improving your account receivable ratio. We’d be happy to answer any questions you may have on this topic!

How do companies measure their efficiency? How can they calculate whether the payments they’re collecting are enough to cover their expenses and finance their future operations? Answers to these questions are multifold, but they all boil down to one fundamental value – the accounts receivable turnover ratio (AR turnover ratio).

The accounts receivable turnover (AR turnover) can tell a CFO or a CEO how efficient their organization is in collecting money from their customers or clients. If you don’t know your receivables turnover, you won’t be able to determine whether your credit policies are good or bad or whether your cash flow supports your business’s advancement.

So, what is the accounts receivable turnover ratio?

It may sound complicated, but calculating it is actually not difficult at all.

What the Accounts Receivable Turnover Ratio Measures

The AR turnover ratio or the debtors turnover ratio is an efficiency ratio – it is a measure of a company’s effectiveness in collecting payments. The accounts receivable refers to the money owed to the company by its customers or clients.

The faster a company gets paid by their customers for a product or service, the higher the ratio is. For example, grocery stores tend to have incredibly high turnover ratios because they operate on a cash basis – their customers pay for their products almost instantly. Likewise, manufacturing companies typically have a low ratio because it takes a longer time to produce their goods, ship them to the customers, and get paid for them.

To calculate the turnover ratio for your business, you will need to understand a couple of formulas and properly implement them in your budget calculations.

The Receivable Turnover Ratio Formula

The formula for the receivable turnover ratio is based on net sales and average account receivables. The net sales are calculated as sales returns, sales allowances, or sales on credit. The average accounts receivable is calculated based on the beginning and ending receivables over an average collection period (a month, a quarter, or a year).

The primary formula looks like this:

Net Credit Sales / Average Account Receivables = Accounts Receivables Turnover Ratio

As mentioned above, the average account receivables section of the main formula is calculated like this:

(Starting Receivables + Ending Receivables) / 2 = Average Account Receivable

To better illustrate how you can use these formulas to calculate the receivable ratio, let’s use an example of a company named XYZ.

XYZ had net credit sales of $3,500,000 in the last 12 months. At the beginning of this period, they had a starting accounts receivable balance of $320,000. At the end of the period, they had a balance of $400,000. This information is enough for us to calculate the accounts receivable ratio for XYZ in the past year.

First, we need to find the average accounts receivable:

($320,000 + $400,000) / 2 = $360,000

Then, we can determine the receivables turnover ratio:

$3,500,000 / $360,000 = 9.72

The account receivable turnover ratio for XYZ in the past year is 9.72. It doesn’t seem high, but whether this is good or bad for XYZ can be determined only by taking into account the industry this company works in and the turnover ratios of its competitors.

Limitations of the Receivables Turnover Ratio

The accounts receivable turnover ratio is important for CEOs and CFOs in evaluating their company’s efficiency, payment collection processes, and credit policies. It is also valuable for investors to assess a company’s performance and whether it represents a good investment.

However, there are also several limitations to this ratio that should be taken into account. By itself, the ratio doesn’t paint the full picture about an organization and how it is financially managed. It also doesn’t predict whether its customers are on their way to bankruptcy or perhaps leaving the company for a rival.

• Total Sales vs. Net Sales

Not all companies use their net sales value to calculate the receivable turnover ratio. Some use their gross credit sales instead.

Gross or total sales is the total sales revenue before any returns or discounts. Net sales are the result of subtracting returns, refunds, or any deductions from total sales.

Companies that use total sales likely don’t do it to be misleading or present an inflated ratio – rather, that is probably just how they do their business.

If you’re an investor trying to ascertain a company’s turnover ratio, make sure to inquire how they calculate the ratio – whether with the total sales or net sales value.

• Seasonal Companies

Seasonal businesses are characterized by specific times of the year when they are far more profitable than in others. They either close down entirely during the off-seasons, scale down their operations, or the demand for their products or services becomes much lower.

If you’re calculating the receivables turnover ratio at different times of the year, they can vary drastically. Seasonal companies can have periods of a low turnover ratio followed by periods of a high turnover ratio, depending on how easy it is to manage sales and payment collections.

Investors shouldn’t randomly choose a period for which to calculate the ratio. Depending on the business type, it should be carefully chosen to represent its effectiveness in collecting credit. Any seasonal gaps can be smoothed out by calculating the average accounts receivable for each month during a 12-month period.

• Needs Context

Once again: the accounts receivable turnover ratio alone doesn’t provide you with all the necessary information to understand why a company might be failing (or succeeding).

For example, a low turnover ratio might not have anything to do with bad debt (credit) policies – there might be a problem in the organization’s distribution system. Their goods aren’t getting delivered on time, and therefore customers aren’t paying promptly, either.

Furthermore, a high turnover rate isn’t necessarily a reflection of good business. It could point to conservative credit-issuing policies or aggressive payment collecting methods. It is also difficult to gauge the effectiveness of a business that runs on a cash basis.

To properly understand the value of the accounts receivables turnover ratio, you must add context to it. It should be just one of the elements to look at when assessing a company’s performance.

Comparing Ratios

If you are an investor looking for a good business to back or a CEO who wants to know how his company is fairing against others, you need to understand how to compare two or more accounts receivable ratios properly. People often compare vastly different organizations and draw the wrong conclusions – this is pretty much like comparing apples and oranges.

Companies of different sizes have different working capital structures and payment terms that influence their turnover ratios. The same goes for companies that operate in different industries.

If you want to get a fair assessment of how a company is doing or whether their ART ratio is high or low, you need to compare companies in the same industry, roughly of the same size, and, preferably, that have the same business models. Anything else might give you a skewed picture of the company’s status.

Conclusion

The accounts receivable turnover ratio is a decent measure of a company’s credit policies and its efficiency in collecting payments. It is calculated using a formula that includes net sales and the average accounts receivable for a specific time period. You can choose whether you want to calculate the ratio for a month, a quarter, or an entire year.

At the same time, you need to be aware that there are some limitations to this turnover ratio. Some companies use their total sales instead of net sales in the calculations, which could lead to an inflated result. Seasonal companies have vastly different ratios depending on the season. The ratio alone cannot provide you with deeper insight into why a company has a low or a high receivable turnover.

To understand how a company is managed on a bigger scale, you will need more information than only the turnover value.

Finally, when you compare ratios of different companies, make sure they belong in the same industry, are of a similar size, and maybe even with the same business model. Comparing businesses in different industries and with different capital structures doesn’t make much sense regarding the accounts receivable turnover.

Do you have any questions about driving more value out of your finance & accounting function? Contact Consero for more information and help in determining whether the accounts turnover ratio for your company is good or bad. We’d love to hear from you!

A good finance & accounting operation is at the heart of every successful business. It would be best to hire a professional Finance as a Service partner to handle your finances, especially if you are running a sizable organization. However, you should also be familiar with at least the basics of finance & accounting so that you can understand what is happening to your business’ budget. One of the fundamental questions is: what is the accounts receivable turnover formula?

To know how to use this formula and what it represents, you also need to learn about the accounts receivable turnover (AR turnover) and the accounts receivable turnover ratio (AR turnover ratio). These sound like complex terms that you may not have heard of before, but they’re not too difficult to understand once they’re broken down.

Let’s start from the beginning.

Accounts Receivable Turnover

The accounts receivable turnover describes how well a company collects its revenue.

Receivable refers to the money owed to the company by its customers or clients. Basically, the receivable turnover reflects how good a company is at collecting payments. It is calculated using the accounts receivable turnover ratio.

Accounts Receivable Turnover Ratio

The receivable turnover ratio is a measure derived from the receivables turnover. The turnover ratio is used in accounting to determine the efficiency of a business – it is also called the debtor’s turnover ratio or an efficiency ratio.

A high turnover ratio typically means that the company has many quality customers who pay their debts in due time. The company’s collection of account receivables is efficient.

In contrast, a low turnover ratio indicates that the company might have poor credit policies, a bad debt collection method, or that their customers aren’t creditworthy or financially viable.

How to Calculate the Accounts Receivable Turnover?

The accounts receivables turnover is calculated using the account receivables turnover ratio.

The receivables turnover ratio formula is as follows:

Net Credit Sales / Average Accounts Receivable = Accounts Receivables Turnover

The average accounts receivable is calculated according to this formula:

(Beginning Accounts Receivables + Ending Accounts Receivables) / 2 = Average Accounts Receivable

The time period you choose to calculate the turnover for is entirely up to you. Typically, organizations like to calculate the accounts receivable turnover ratio for the past 12 months.

These operations might seem too confusing when presented as dry formulas like this. Indeed, you probably aren’t sure how to calculate the average accounts receivable, let alone the turnover. To better explain how the receivable ratio works and how you can find the ratio for your organization, here is an example:

Company XYZ earned $950,000 in net sales over the past 12 months. On January 1st, their receivables were $70,000 (beginning accounts receivables). On December 31st, their receivables were $81,000 (ending accounts receivables).

This is their average accounts receivable:

($70,000 + $81,000) / 2 = $75,500

Their accounts receivables turnover ratio is then:

$950,000 / $75, 500 = 12.58

The conclusion is that for the company XYZ, the accounts receivable turned over 12.58 times in the last year. If we want to extract useful information out of this, we have to calculate the accounts receivable turnover in days according to this formula:

365 / Accounts Receivables Turnover Ratio = Accounts Receivables Turnover Ratio in Days

For XYZ, this means:

365 / 12.58 = 29.01

The average account receivable was collected in approximately 29 days. It means that it takes, on average, 29 days for the company to collect payment from its customers or clients. Whether this is good or bad for the company requires comparing the result to previous years and analyzing the financial statements.

Receivables Turnover vs. Asset Turnover

The accounts receivables turnover and asset turnover are often considered to be one and the same. However, there are slight differences between these two terms that shouldn’t be mixed.

The asset turnover ratio describes how well a company uses its assets to generate revenue – the emphasis being on generate. Investors can use this turnover to compare companies within the same sector or group. The asset turnover is impacted by significant asset purchases or large asset sales within a defined accounting period (usually a year).

In comparison, the receivables turnover is all about collecting money. The asset turnover ratio measures how well the company utilizes its assets, while the account receivable turnover ratio describes how it manages the credit it extends to its customers.

Importance of the Accounts Receivable Turnover

As mentioned above, the general rule of thumb is that a high receivable turnover is good, while a low one is bad. However, this doesn’t always have to be the case – different conditions have to be taken into account for each company.

For example, grocery stores typically have high turnover rates because they get almost instant payments from their customers. In such cash-heavy businesses, the AR turnover is not a good measure of how they are managed.

In the same vein, manufacturing businesses tend to have a low turnover rate because the payment terms are different. The time that passes until payment is collected is a lot longer than in the case of a grocery store.

The accounts receivable turnover allows organizations insight into how quickly they collect their payments. This information is essential when the organization plans its future investments and even pays its bills and expenses on time.

Secondly, the receivable turnover ratio can point at faults in the organization’s credit policies. It is a valuable tool in determining whether all the processes support good cash flow and business growth.

Another important point to emphasize is that even if you have a favorable turnover ratio, it does not tell you whether some of your customers are on the path to bankruptcy or considering leaving you for a competitor. The ratio is about overall customer trends, meaning it can’t pinpoint individuals to tell you who your best and worst customers are.

Tracking the Receivable Turnover

It is not enough to simply calculate the turnover each year and observe it as an isolated occurrence. To keep track of your company’s performance and efficiency, you need to monitor the receivable turnover over time. It will help you recognize opportunities for improvement in your credit policies.

Tracking the accounts receivable turnover also has the following benefits:

• Improving your collection processes
• Forecasting your future cash flow
• Getting a bank loan – Bankers will want to see your receivable turnover so they can determine the bank’s risk in approving you for a loan. The accounts receivables are often used as collateral. Generally speaking, the higher your turnover ratio, the better your chances are of obtaining a loan.

Look for patterns in your turnover that emerge over time. They will reveal the impact of your company’s credit practices on its profitability.

Furthermore, as mentioned above, investors can use the receivable turnover to get a sense of an average account receivable turnover for a specific sector or industry. If an organization has a higher turnover than the average, it might prove to be a safer investment. Again, it all depends on the bigger picture and how the turnover value fits into the overall performance of the company.

Conclusion: The Big Picture

The accounts receivable turnover describes the efficiency of a company in collecting payments. It is different from asset turnover, which describes how a company uses its assets to generate revenue. The receivables turnover is calculated by using the formula for the accounts receivable turnover ratio.

The most significant aspect of the accounts receivable turnover is that it cannot tell you much by itself. If it is high, it could be because your company is running on a cash basis, or you have high-quality customers who pay on time. However, it could also mean that maybe your collection practices are aggressive or you are too conservative about extending credit to your customers.

The same goes for a low turnover. It doesn’t have to mean that your company is operating poorly – just that the nature of your business requires a longer time to collect payment.

It is important to compare your receivables turnover with the turnover of your competitors. Additionally, tracking the pattern of your turnover over time will help you determine your business’s performance.

If you have any questions about the accounts receivable turnover or would like some help with calculating yours, don’t hesitate to contact Consero. We would be happy to lend you a hand and alleviate some of the stress of managing your receivables. Reach out for a free demo if you’d like to see what we can do for you!

Accounting is essential for any business, no matter how big or small. Some company executives have in-house accountants to handle their finances, while others outsource those services. Nevertheless, even if you are not accounting-savvy yourself, you should be familiar with at least the basic accounting concepts. One of those is the accounts receivable turnover or AR turnover.

At first glance, AR turnover seems like a complex thing. There are special formulas used to calculate it and guidelines that dictate how you should compare your turnover to your competitors.

The ultimate guide to accounts receivable turnover in 2022 will introduce you to the basics of this business metric and how you can use it to improve your balance sheet. Read on to learn the definition of the accounts receivables turnover, the receivables turnover ratio, how you can calculate it, and what it means for the performance of your organization.

What is Accounts Receivable Turnover?

The accounts receivable turnover is a measure of how well a business collects its revenue. Receivable is used to describe the money or payments owed to the business by its clients or customers. Theoretically, if a company is efficient in collecting its receivables, it has a high turnover rate. If it’s not so efficient, it has a low turnover rate.

The receivable turnover is calculated using the accounts receivable turnover formula for the accounts receivable turnover ratio (AR turnover ratio or ART ratio).

Accounts Receivable Turnover Ratio

The receivable turnover ratio is an efficiency ratio that reflects the receivable turnover. It can also be called the debtors turnover ratio.

The receivable turnover ratio is different from the asset turnover ratio. The former describes how well a company collects its payments, while the latter describes how well a company utilizes its assets to generate revenue. The key difference here is between the words collect and generate.

The receivables turnover ratio can be found through the receivable turnover ratio formula:

Net Sales / Average Accounts Receivable = Account Receivable Turnover Ratio

Net sales can also be called net credit sales.

The average accounts receivable (average AR) for a specific time period is calculated like this:

(Beginning Accounts Receivables + Ending Accounts Receivables) / 2 = Average Accounts Receivable

You can choose what you want the average collection period to be – a month, a quarter, or a year.

Receivable Turnover Ratio Example

Here is an example based on a fictional company named ABC to help you better understand how to use these formulas.

First, let’s calculate the average accounts receivable for an entire year at ABC. Their receivables on January 1st were $81,000. These are beginning accounts receivables. Their receivables on December 31st were $90,000. These are ending accounts receivables. So the average accounts receivable is as follows:

(81,000 + 90,000) / 2 = 85,500

Their net sales during the year were $930,000. Their turnover ratio was:

930,000 / 85,500 = 10.88

According to this result, ABC’s accounts receivable turned over 10.88 times in twelve months. We can use another formula to extract useful information from this:

365 / Accounts Receivables Turnover Ratio = Accounts Receivables Turnover Ratio in Days

In this case, the receivable turnover ratio in days is:

365 / 10.88 = 33.55

The conclusion is that it takes an average of 33.5 days for the ABC company to collect payment from its customers. When observing this number by itself, it doesn’t tell us much. Only when we compare this ratio with that of other companies can we get an idea of how well ABC operates.

What is a Good Receivables Turnover?

In the most general sense, a low receivables turnover is bad, and a high turnover is good. However, these two distinctions require a more detailed analysis.

• Low Turnover Ratio

Typically, a low turnover ratio means that a business has bad debt collection practices and poor credit policies. It could also mean that its customers are not financially viable enough to settle their dues on time.

However, companies that take longer to manufacture a product and deliver it to their customers have a naturally low receivables turnover.

Furthermore, if your ratio is low, it might not have anything to do with your payment collecting practices. A different part of your business could be in trouble, such as your production process being too slow or your distribution system not managing to deliver your products on time.

• High Turnover Ratio

Opposite to the low ratio, a higher ratio usually points to good credit policies, high-quality customers with enough money to pay on time, and a short waiting period between invoicing and payment. Companies with high turnover ratios have a good cash flow that can easily support their business growth.

On the other hand, it may not be that clear-cut. A high turnover rate is expected for businesses that operate on a cash basis (for example, grocery stores), meaning that this ratio is not an accurate measure of their efficiency.

A high ratio can also result from a company’s conservative credit policies or aggressive debt collection methods. Without even knowing about it, an organization may be losing customers to their rivals who have better credit terms.

Comparing Receivable Turnovers

A CEO or CFO of a company will want to know how their business is performing compared to their competitors. Investors, likewise, want to know the receivables turnover so they can gauge whether a company is worth investing in.

When comparing turnovers, you must know how to do it properly. You cannot simply take any company that you perceive as successful and evaluate your business against it. Specific guidelines have to be followed so that you don’t reach the wrong conclusion.

First and foremost, only businesses within the same industry should be stacked against each other. There is no point in comparing retail stores to manufacturing businesses when they have vastly different capital structures.

Ideally, you should compare your turnover with companies in the same industry as you, the same approximate size, and preferably have the same business model. Any deviation from this might result in a skewed comparison that will leave you thinking your AR turnover is higher or lower than it really is.

Limitations of the Receivables Ratio

When comparing the accounts receivable ratio of an organization to other companies, you need to consider several limitations.

• Net Sales vs. Total Sales

In the formula for the receivable turnover ratio, the value of net credit sales is used. However, some companies use the value of total sales instead.

Total sales (gross sales) is sales revenue before discounts or returns. Net sales are the result of subtracting deductions (refunds, returns, etc.) from total sales.

Those who use total sales when calculating their receivables ratio most likely don’t intend to be misleading – it’s probably just the way they do their accounting. Keep in mind that these results are more inflated compared to ART ratios calculated via net sales.

If you’re an investor looking for a good opportunity, make sure you inquire how an organization calculates its accounts receivable ratio before making any decisions based on that.

• Context Required

Unfortunately, once you have the ratio number in front of you, you cannot glean much from it unless you put it into context. To effectively compare it with other companies, you should follow the guidelines outlined above.

If you find that your ratio is higher than average, you need to ensure this isn’t due to strict credit policies. Additionally, if your ratio is lower than average, it might not have anything to do with collecting payment. Thoroughly assess every aspect of your business to find out why exactly your receivables turnover is lower than it should be. Are your customers on the verge of bankruptcy? Are they leaving your business for a competitor?

To accurately draw conclusions from your AR turnover ratio, you must observe it as part of a bigger picture. Context is crucial.

• Seasonal Companies

The receivables turnover of seasonal companies can vary drastically throughout the year. These businesses operate at full capacity during specific times of the year, while in others, they close down entirely or massively scale down their operations.

It isn’t uncommon for seasonal companies to have lower turnovers in their peak seasons when it is more challenging to keep track of all the orders, customers, and payments. They could have much higher turnover ratios during their off-seasons when they have more time dedicated to collecting dues.

If you’re intent on investing in a seasonal company, you should carefully select a time period for which to calculate their ratio. This period should accurately reflect the company’s effectiveness in collecting the debt. Potential seasonal gaps can be evened out by calculating the average receivable for every month in a single year.

How to Improve Your Receivables Turnover

You’ve done everything right – double-checked the formula for the turnover ratio and compared it to businesses similar to yours – and now you’re faced with a low turnover rate. Your company isn’t doing as well as you want it to. Now what?

There are several ways you can improve your receivables turnover. Here are some of the most effective suggestions:

• Regular Invoicing

Every invoice you send out should be detailed and accurate. It will save your customers from having to deduce what’s what and strictly how much they’re required to pay. A clear, understandable invoice saves time and helps you receive your money faster.

Do your best never to miss your invoice date, if there is one. If there isn’t, you should send your bill the moment the work or service is completed. Sending invoices late could be another reason you’re not getting paid on time – you’re simply not giving your customers a chance.

Moreover, it is better to regularly invoice smaller costs than wait for them to pile up. Psychologically speaking, customers will have an easier time paying for several bills for lower amounts than one bill for a vast amount. Besides, if you wait too long to send the total bill, they might already mentally move on and be unpleasantly surprised with the price at the end.

• Software Reminders

Another method to improve your turnover can be tied to the first bullet point – having accounts receivable software that reminds you when invoices are due to be sent out. Instead of managing multiple documents for outstanding invoices, new orders, clients waiting for their product, financial statements, etc., you could have it all neatly organized in one software package.

You won’t have to worry whether or not you sent a bill on time. If it is designed right, you can also use the software to send automatic reminders to customers before the deadline on their invoices runs out!

• Clear Payment Terms

Before your customers sign any agreements, they need to have a clear understanding of payment terms. If the moment comes when you must enforce strict policies, you cannot hope to do that if you haven’t disclosed them to your customer first. All forms of communication (invoices, agreements, and contracts) must clearly outline your customers’ duties regarding payment.

Standard practice is to implement a 30-day payment deadline. If your customer doesn’t pay their dues in 30 days from the moment they receive their invoice, you can include extra charges for late payments. Similarly, if a customer is a valuable one – paying more money than usual – you can negotiate better credit terms or payment plans that will benefit you both.

• Strong Customer Relationships

Customer relationships based on trust and positive emotions have numerous benefits. These people are loyal followers of your brand and will return for more purchases. They will spread the word about your business, products, or services to their family and friends, or even better – on social media. And lastly, they will be more inclined to quickly pay their debts to you, not to jeopardize the good relationship they have with your business.

To build a strong relationship with your customers, check in with them from time to time. See who your most loyal consumers are, send them an email, or perhaps give them a call. You could even offer them a discount or a special deal for their loyalty to your brand.

• Simpler Billing Structure

Finally, many companies get lost in the number of customers they have and bills they need to keep track of every month. Even with an efficient software solution, errors can happen.

If it is possible for your company, try moving onto a more straightforward billing system, such as fixed-fee billing. Essentially, your customers will be on a fixed monthly subscription for which they will be getting a previously-agreed upon service or product. Most SaaS (software as a service) platforms function this way.

Fixed billing ensures that customers aren’t surprised by unexpected costs (since they will be paying the same amount each month), and it also offers you the chance to withdraw funds directly from their accounts. With fixed-fee billing, there is no waiting period between invoice and payment – on a specific date, your company charges your clients with their fee, and everyone’s happy!

Tracking Your Receivable Turnover

Just as you cannot infer much from the turnover value alone, you also cannot make predictions of your company’s profitability or efficiency if you don’t keep track of the turnover over time. It will help you forecast your future cash flow, plan for future investments, or even get a bank loan! Banks often use the account receivable as collateral when approving a loan.

When tracking your receivables turnover, search for patterns that emerge over time. They will clearly showcase how your credit policies are affecting your company’s performance in the long run.

Conclusion

The accounts receivable turnover is a valuable measure in any accounting system. This value is calculated using the accounts receivable turnover ratio that tells the company’s executives or potential investors how efficiently the company collects its payments (receivables). If the turnover ratio is high, typically, the business has little to no problems collecting payments from its customers. If the ratio is low, there could be room for improvement.

When comparing the receivables ratio of two or more companies, you must keep in mind that these companies should be as similar as possible. They should be from the same industry and of a similar size and business model. It would be best to consider differences in turnover between different seasons of seasonal businesses and whether a company uses its total sales or net sales value to calculate the turnover ratio.

If you find that your turnover isn’t satisfactory, there are ways you can improve it. You could implement a software system to remind you and your customers of when payment is due. You could enhance your invoicing so that it is more regular and detailed. Building solid relationships with your customers and clearly communicating the payment terms to them also lead to a higher turnover rate.

Accounts receivable management is not too complicated when broken down, but it does require time and effort. If you’d like some help or have any questions about the receivables turnover of your business, don’t hesitate to contact Consero Global. We would be happy to assist you in improving your receivable balance as much as possible!

Recently, Chris Hartenstein, Consero’s VP of Customer Success, hosted a conversation about the role the finance function can play in an add-on acquisition strategy and how to develop a readiness plan that paves the way for a successful integration. 

More than ever, buyout groups are investing in industry platform plays with an aggressive acquisition strategy to build value, but that requires a swift and competent integration into the operations of the buyer. So what role does the finance function have in ensuring that happens? Consero Global’s VP of Customer Success, Chris Hartenstein has personally helped integrate 18 companies with their buyers over the last year and knows the real-world challenges of the process.

He hosted a chat with Trey Chambers, the CFO of the B2B software tools provider IDERA, that has been owned by multiple PE firms, and Elizabeth “Scottie” Wardell, the Managing Partner of the middle market PE firm, Integrity Growth Partners. And for the perspective of a target company, they’re joined by Steve Isom, the CFO of donor management software and system provider Bloomerang, who had recently supervised the acquisition of his previous employer, Flywheel. Below is a lightly edited version of their conversation.

Chris Hartenstein (CH): What are some of the key priorities that companies should be looking at as they negotiate closing some of these acquisitions? Trey, you’ve managed 17 acquisitions over there, so tell us what you look for. 

Trey Chambers (TC): We haven’t always been good at it, but we keep learning. The key for all M&A is a good target, and that means knowing what you’re looking for. We have an M&A team in-house, with a pipeline of targets, and we’re always looking at who’s in our space and building those relationships, as a lot of our acquisitions are through our informal chats [with targets]. Most of all, I’d make sure there’s a strategic purpose. Maybe they have a better technology or one that doesn’t do what your [offering] does, or maybe it merely removes a competitive threat. Some are growth acquisitions, some have recurring revenue, maybe they have an older technology, but offer an opportunity for synergy. We think our ideal target has some combination of those qualities.

Once we have a target, we create what we call is a “skinny model” with high level financial information from the target, and then we’ll discuss a purchase price based on revenue or EBITDA multiples and then pressure test that as we begin diligence. You need to make sure you’re ready. We hire Deloitte to do a “quality of earnings report,” which takes the historical financials and does the equivalent of a mini-audit that traces any anomalies, one-time events, etc., so we truly understand the company’s historical performance. Then we assign the various diligence duties. We have a diligence tracker, and after all these years, we have a good one that tracks cash management, who’s doing the GL, and so on. Our goal is to get these deals done in 60 days, although it still tends to be 90 days, so it’s still pretty quick. The goal is to finish, or cut bait quickly.

I used to have a small team focused on diligence, but now I invite a lot of the team on a lot of the calls, because we used to close the deal, only to struggle with integrating the company afterwards. But now everyone is up to speed prior to close, so we can hit the ground running.

Elizabeth “Scottie” Wardell (ESW): I’d like to reiterate Trey’s point about having a sound rationale and thesis for this acquisition. It can be attractive to say, “I can get this at a really cheap multiple,” but if you don’t have great rationale that fits with the overall story of the company, when you go to sell, the buyer will unpack why this was added, and you won’t get credit for simply adding dollars to your P&L. In fact, it may distract from organic growth opportunities. Don’t be too focused on how things look on paper, because it still has to makes sense to the overall business thesis.

I’d add that people should think about these acquisitions structurally. What does it take to finance these acquisitions? If you’re going to incur debt, will that put a burden on the company’s other growth activities? So you should think about where the capital is going to come from, especially as I work with a lot of lower middle market companies that are at key organic growth inflection points, in addition to whatever M&A strategy may be explored.

CH: Steve, you’ve been on the other side of all this, having been recently acquired. What’s your perspective?

Steve Isom (SI): Something to consider with these deals is by the time diligence begins, it’s really confirmatory. There’s already a thesis and a LOI, so the role of finance is to give them confidence. Think about every interaction with a potential buyer as a chance to  further build that confidence in the business. This means erring on the side of transparency, giving the internal roadmap of controls, policies, forecasting and tell the story of where you were, where you are and where you were planning to go. I think you can develop a good relationship with the acquirer, so if you find yourself in a situation where a number you shared was incorrect, or there’s a detail that you pulled, you’ve built that rapport and trust with the acquirer, where you can have an open conversation about it, rather than trying to sneak by any adjustments to the data room.

CH: So much of what you need to make these acquisitions a success come from the finance function, and when the target’s finance department is in disarray, it can stall the deal. So what are some red flags that you’ve seen that would give you pause, and how have you ensured your finance teams don’t wave any such flags too? 

SI: There’s this idea of deal readiness. There’s a difference between an unsolicited inbound offer and going into an exclusivity process, or hiring a banker where you have 60 days to prepare. I’ve made a point to have info available and structured to be ready for that. When you’re on the acquirer’s side, you’re really looking for an efficient process at the target. Is the finance leader inheriting any operational debt? Are there things broken in the processes here?

ESW: If the numbers keep changing, or if different systems are saying very different things, that’s a red flag. This doesn’t imply anything nefarious, just that there may be more “noise” around the earnings. Inconsistency matters. In the presentation of the numbers- how confident are they talking about the numbers? How comfortable are they with them? What are the key drivers? Are they coming off as transparent, or do they bristle when I get to the next layer of questions? Some of that can be discerned by the body language of the different parties, say between the CFO and CEO, and if there is tension. Are they cutting each other off? Maybe there’s a lack of coordination and those are red flags. If you can’t reconcile cash at the end of the day, that’s most certainly a red flag as well.

CH: I like the idea of body language and making sure that people are being transparent. Trey, what are the red flags are you seeing?

TC: Is the data easy to reach? Are questions answered quickly? Is there pushback- some of that pushback is legit, but when it’s not, you need to decide [if it’s worth that trouble.] Acquiring small and unsophisticated is much harder than acquiring large and sophisticated, in terms of integration. A lot of companies in the lower middle market are cash-based by nature, so they’re not as mature on the process and accounting front, which means you’ve got to pick up the pieces post-close. I’ve always told my team, get everything you can pre-close, since if this is a synergy play, you may lose people who know things, and they are far more motivated to give that data before closing.

CH: Smaller deals take as long, if not longer, to close than big ones. In getting ready for deal, what should you have on hand from a finance perspective? 

SI: Most of the time, people underestimate how long it takes to integrate a business. Take any pain point in your business and understand that it will amplified and exacerbated during this process. Get the teams working together as soon as possible- maybe they outsourced or they have a great team. As Trey said, you have their attention before closing.

TC: One of our CEO’s favorite statements is “Get to the future.” The future is always scary but we know we need to get there. 90% of the time we want to use our processes and our playbook and the seller is, like everyone else, convinced their way is the best way. These are difficult conversations that don’t get any easier, so it’s best to have them upfront.

Next, have a staffing plan. I understand which positions are there and which will still there after the deal closes, and be sure to plan on turnover, complete with a back-up plan. The last element I’d suggest is that we do is weekly integration meetings about two to three weeks before the deal closes, if it looks likely. And we start building from there. Three or four weeks after that, we’ll invite staff from the target as well to participate.

CH: Scottie, what’s the value of the finance function of either side of the deal?

EW: [The finance function] can serve as a “quarterback hub” for the integration and analysis work. I’d add, think about the change management opportunity. It’s a lot of people getting together to do things different, and there will be energy from acquirer and target, and the more thoughtful you are there, being methodical about culture and giving opportunities to show shared goals and deal with any “hidden” info. How do you factor in people’s fears and hopes around this process? How do you optimize the best of the both groups? Things can get damaged if you don’t tackle the human element here, no matter how fancy the algorithms are. And the finance function can play a role in this.

SI: That’s especially true if most of the staff will be staying. Over-communication is key. Put yourself in their shoes. There are all these assumptions from the acquirer that there are these key people we want to stay, and well, the acquirer needs to say just that. Tell them that they are those key people. And to Trey’s point, if you try not to rock the boat, and assure them that they can keep most of their processes in place, every little change will seem all the more disruptive.

TC: People getting acquired are by nature scared, and they’ll assume the worst. “I’ll be fired,” or “The new processes will be worse.” So don’t string anyone along. We’ll meet everyone across functions within a week of the deal closing, and update them if we know we need them, or if we know we don’t need them, and even that we’re not sure yet, but promise that as soon as we know, we’ll tell them. People like certainty, and that will engage everyone faster for the Company’s future. People appreciate that, even if it’s bad news.

CH: Exactly. Don’t leave them in limbo. Steve. From a deal readiness standpoint, how did you share data when your prior company was acquired? It was an unsolicited offer, correct?

SI: That’s right. And from the first meeting to close was, I think, roughly 30 days. We had recently been through an equity raise so there were a lot of materials already in hand, and as a recovering investment banker, let me tell you, a professional presentation lends a lot of credibility. And honestly, we benefitted from having Consero. Because of their process, the team completed a full diligence list from Deloitte in 24 hours, and that kept the deal rolling along. That instills a lot of confidence.

CH: What else can a finance function do to help close these deals and scale both finance teams together? 

TC: Consero is great at onboarding new companies, since everyone that moves to their platform is coming from another platform. So Consero moves those companies to the platform efficiently, which allows us to focus on the business. And don’t forget the financial planning and analysis side here. So we refine that skinny model from the LOI stage and have a final model in place, and then we focus on that as we move forward. For all these acquisitions we measure them on a stand-alone basis for the first year so we can measure the P&L off the model and focus on the KPIs, to gauge where we are compared to our plans.

SI: You also need to make sure the CFO understands the thesis and the success criteria for the deal. Explain to the CFO the five or six milestones along with a reporting cadence against those metrics, and there’s no better way to assess success.

ESW: There’s always a lot of moving pieces post-close so I’d stress there needs to be a clear project management function, or at least a systemic approach over who owns what. And  finance can help lead that systemic approach. And losing sight of that can cause plenty of unnecessary value destruction.

TC: To that point, as part of our playbook now, we created a diligence tracker and appointed someone to manage that tracker. It keeps everyone on their toes, and keeps the integration engine humming.

SI: As a seller, make sure there is a project manager before the close, and that QB needs to make sure that the context of the deal is kept in mind. If that head of R&D answers the questions in a vacuum, there can be problems. Someone needs to make sure that the responses are consistent. CH: And that consistency can build a lot of trust. I think we all know that  no acquisition will be successfully integrated without that, and the finance function plays no small role in building trust in the numbers and the process, along the way.

A PE fund makes most of its investment returns by selling portfolio companies at a profit. Most portfolio firms are then sold to sophisticated buyers (strategic buyers like corporations wanting to add a new unit) who could be expected to shun the market if the target firm was destined to fail. That’s why the private equity fund must thoroughly think through every investment decision, which is where there’s no place for mistakes in the finance department.

For several years now, the private equity industry has been flourishing – with growing fundraising, valuations, and transaction volumes. Therefore, leaders of private equity portfolio companies will find this list of common mistakes to avoid quite valuable. Let’s take a look at those common pitfalls and ways to resolve them so your finance function can begin providing more value to your organization. 

Common Finance Mistakes Made by Private Equity Portfolio Companies

1. Finance function processes that cannot scale

Having centralized finance data brings the opportunity to automate and standardize their processes. When your staff spends most of their time manually performing administrative tasks, they cannot contribute more to growing the company. This scenario often inhibits growth, and the PE Operating Partner will see that the portfolio’s team doesn’t have the tools, processes, and people required to meet the established goals. 

Expensive finance and accounting department

The cost of finance and accounting becomes increasingly problematic when inefficiencies in the department continue to grow. Private Equity firms expect that finance and accounting cost 1% of the revenue (or less) as the organization scales up to $100 million in sales. 

Inefficient business processes

There is no room for manual business processes in a high-growth company. As the company gets set to grow, these processes must be automated and all systems connected. Otherwise, growth will be limited. Efficient companies are built on well-defined workflows and standardized practices that drive business processes across functions and departments. Automation must be implemented to reduce human errors and costs wherever possible and achieve standardization of processes. Once that is achieved, Artificial Intelligence and business software can drive many business processes.

2. Reinventing/optimizing the F&A function

Time is the most critical factor for any portfolio company. Once the PE makes an investment, they expect the F&A function to be optimized within approximately 100 days. Optimizing the finance and accounting function may include optimizing processes and upgrading software systems. It often happens that middle-market companies realize their F&A systems present an obstacle to growth. The CFO shouldn’t find it challenging to decipher the KPIs of their business.

For example, if your business is using QuickBooks, there are a few common problems that high-growth companies might experience:

• The absence of certain functions essential for fundraising (e.g., reporting functions)
• Data and user limits
• Bottlenecks within finance and accounting departments that come as a result of lack of automation

These outdated or incomplete systems need to be re-build, and too many firms waste their time on that. When tasked with implementing financial management systems and hiring accountants and controllers, CFOs spend their time building and “reinventing” instead of optimizing current systems. 

Points of failure

When portfolio companies choose to build their F&A foundation, there are many points of failure, such as:

Reporting. Producing accurate reports to verify that all business transactions have been appropriately processed and assure that audit and tax compliance needs are met. 

Finding and implementing the right software solutions. Finding the right software is only the beginning. Implementation, training, and integration of disparate systems take time.

Hiring. Finding the right people, hiring, and training them quickly.

The abundance of F&A software options

When it comes to F&A software, CFOs have so many options to choose from. To make the right decision, he or she must answer some crucial questions, such as:

• What features of an Expense Management tool are vital for my business?
• Which General Ledger for record-keeping is best for a services business vs. a software business? Do all of them integrate with my business’ CRM?

It takes between 9 and 18 months to build the whole F&A foundation, but the question is – will the F&A department be optimized at the end of that period? The teams in an optimized F&A function should be able to scale with digitized and automated processes and systems, deliver forward-looking metrics and standardized KPIs, and close the books in 5-10 business days and be ready for an audit.

3. Hiring a CFO with the wrong skill set

Private Equity portfolio companies often hire a CFO to establish a fundamental financial structure and build an F&A team. However, the CFO must have strategic skills that will ensure the vital factors that drive the company are understood and communicated to the organization’s C-suite.

Hiring the right CFO – builders vs. maintainers

There are two categories in which most CFOs fall into – builders and maintainers.

Builders are known as strategic CFOs. These are financial leaders who can take hold of a chaotic situation and find a way to help their company thrive. They often come from a background of business process design or system implementer, and they like to clean things up. As for the maintainers, these financial leaders thrive at the repeatable functional aspects of F&A management. They don’t excel in high-volatility environments that experience frequent, high-levels of change but are well organized. Maintainers often come to this position from the rank of a controller or accountant.

The common pitfall for many high-growth businesses is hiring an operational CFO (maintainer) and expecting them to bring strategic skills to the table. Maintainers are expected to build the F&A function and provide strategic guidance. Still, without a strategic skillset, maintainers cannot present the financial data that leaders require to identify opportunities and cope with current roadblocks.

On the other hand, a strategic CFO (builder) knows which questions to ask and provide the right insights to leaders, so they know when to say yes and when to speak no (in order to stay focused on the most crucial initiatives). Such CFO is able to envision the finance function and design its processes.  

4. Not having access to timely information

The information that leaders and managers need in order to be able to bring the right decisions must be timely and forward-looking. The CFO shouldn’t be the one who has all the answers and to whom executives go to whenever they have a question. Such a system puts the business at risk.

Decision-makers don’t need their financial information buried in finance and accounting, which is another reason why organizations need centralized finance data. With disparate business management systems, CFOs spend their time formatting, validating, and exporting spreadsheets. They also have to complete and review reports to investors, regulators, auditors, and other external audiences. The reporting process eats up much of their time, so CFOs are left with no time to focus on providing strategic guidance.

Without visibility into financial data and a firm understanding of the company’s financial health, accurately measuring and monitoring performance becomes impossible. For example, the PE fund manager won’t be able to calculate EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), which is an essential metric used by private equity fund managers that allows investment evaluations and decisions to be made while excluding the effects of certain F&A decisions.

5. Disparate F&A systems

Having multiple disconnected systems can make F&A operations especially costly, complex, and clumsy. Yet, not many companies define best practices and strategies to unify and harmonize these systems. There are silos of data resulting from the proliferation of specialized point solutions (such as expense, payroll, accounts payable, and billing solutions). Data from all of the disparate systems then needs to be imported into the general ledger, but transactional detail gets lost along the way. 

With all the disconnected data spread across different company departments, accountants have to spend much of their time creating spreadsheets that combine the information required to create reports for the decision-makers. Since this process is manual, it carries a lot of room for omissions and errors. Furthermore, the company cannot process automation or standardize workflows without centralized, connected systems.

Consero Helps Avoid Common Finance Pitfalls

By pairing with a FaaS (Finance as a Service) provider, Private Equity portfolio companies can modernize and optimize their finance function. Consero is a FaaS provider that can help you take advantage of AI to gain efficiencies and integrate all your financial systems to unify your data. The benefits of teaming up with a FaaS provider include:

• Building the foundation for scalability into your financial management systems
• Gaining insight through AI and connected data
• Automating manual processes to drive efficiencies

From the moment a PE fund buys a private company, the game changes. PE investors, financial leaders, PE executives, and their management teams must adapt their processes and be aware of the common finance mistakes made by private equity portfolio companies. It’s time to engage in the right financial modeling and partner up with the right consulting firm that will make sense of each private equity investment you make. The key for PE firms has evolved from the ability to increase the leverage and improve the capital structure to also encompass enhancements in value creation and operational efficiency.

We can help you lead your portfolio companies to a clean balance sheet, better cash flow, and accurate business valuation. With Consero and our FaaS solution, Private Equity firms and their portfolio companies will get a unique, out-of-the-box F&A department and accelerate their acquisitions’ ROI. We provide on-demand finance experts that can help engineer new software and process enhancements to meet a growing portfolio’s requirements. 

For more information on Consero and our FaaS solution, feel free to contact us today.