Why is it important for a business to track its efficiency in collecting receivables?

Answer 1

Two main reasons:
1. If your business is taking months to collect revenues, that means someone else is using your capital. You are not receiving the benefit from your capital (money), instead someone else is using your money to make money for themselves. For example, if you have an average of $2000 in AR each month, you don't have that $2000 in the bank collecting interest (about $60 of interest @3%) or $2000 worth of goods to make more sells.

2. If your business is spending too much "efforts" to collect receivables, your net income is reduced by the hours/labor spent on collection. For example, instead of $10 profit for each item sold, your business spent $1 worth of cost and labor to collect the payment, hence reduced your profit to only $9 per item sold.

Best wishes.

Answer 2

Receivables include both your inventory and your potential profit. If you have a 40% efficiency, then you are giving away 60% of your inv. & prof. If your efficiency goes up, then you gain on both the inventory payment as well as the profit side.
If your efficiency suddenly tanks, you need to know if it is pricing, items, clerks, or clientell that is shifting.
If your efficiency suddenly soars, you want to maximize whatever is causing it.
Receivable collecting is the edge of the knife blade in profit.

Answer 3

Receivables are incoming money - aka - profit. If you sell something to another company, you might have terms of say net 30. that means you gave them 30 days to pay you back. You want it back as fast as possible so that you can theoretically reinvest. If you're a small business, getting money back as fast as possible is key to success. That's also why some businesses give incentives such as net 10 2 percent meaning if you pay me back within 10 days, i'll give you a 2 percent discount.