The end of the year is a stressful time for your accounting team. Year-end closing activities are imperative to making sure that you start 2023 off right. Want to make sure that next year’s accounting goes well? Read our guide! This guide breaks down the best fiscal year-end closing procedures and offers some general accounts receivable best practices! Follow these tips to ensure your accounts receivable is ready for 2023 and beyond!
Why Year End Closing in Accounting Is Important
Year-end closing procedures are crucial because they identify balances and deficits on your records that are carried over into the new fiscal year. This examination lets you create more realistic budgets based on the previous year’s actual spend, since concrete figures are more accurate than estimates.
Our Fiscal Year End Closing Procedures
Send Final Invoices
While excellent communication should be happening internally, good client communication is paramount, which is why sending out regular, consistent invoices is crucial.
Send out your invoices as soon as possible. Sending them out ASAP gives you the best chance to receive December payments before the end of the year. You can’t always blame poor AR on your clients—make sure that your AR processes are simple on the client’s end, and make sure they’re easily executable on the client’s end.
After sending your final invoices, we recommend sending payment reminders to outstanding invoices from earlier in the year. Find your list of outstanding accounts and contact clients who haven’t paid yet. They’re likely closing out their books too, so this is one of the best opportunities to get in touch with them.
Make sure that all contact you make with these clients is cordial. Many business owners make the mistake of following up with outstanding accounts aggressively in the hopes that it’ll spur a response. In reality, all this does is damage your reputation, impact your relationship with the client, and increase the likelihood of you marking down bad debt expenses.
Struggling to Communicate With Outstanding Clients? Communication about outstandings accounts can feel awkward. Have you struggled being assertive without being aggressive?
Run an Aging Report
Another recommendation in year-end closing in accounting is an aging report, which identifies unrecoverable accounts. There are many reasons that an account could be considered unrecoverable, whether it’s from lost contact or an outright refusal to pay.
These accounts going unpaid affects your days sales outstanding (DSO) and restricts your available cash flow. This could be incredibly damaging if you work in a capital-intensive industry. Some businesses need a consistent cash flow to reinvest into new opportunities or simply sustaining opportunities. The importance of keeping a healthy cash flow cannot be overstated—in fact, a U.S. Bank study identified that 82% of small businesses fail because of cash flow issues.
In addition to directly impacting your financial situation, a high DSO could disrupt credit or investment opportunities. Investors may be turned away from your business if they notice you have a high DSO when compared to the rest of the industry.
Calculate Your Accounts Receivable Turnover Ratio and Average Collection Period
Understanding your AR turnover ratio and average collection period is key to getting perspective on your financial situation, making these two calculations one of the most important year-end closing in accounting steps.
The AR turnover ratio identifies how many times in a period that accounts receivable were successfully collected on. Follow this formula to calculate your AR turnover ratio:
AR Turnover Ratio = Net Credit Sales / AR
Compare this year’s ratio to previous years to better understand what direction your business is trending in. A ratio trending closer towards 1.0 indicates that your accounting processes are improving. A downward trending ratio indicates that your collection process is becoming less effective year over year.
A second figure worth calculating is your average collection period. Calculating your average collection period can help you better understand if customers are paying on time, and how long it takes to convert your AR into cash. The average collection period can be calculated with this formula:
Average Collection Period = 365 / AR Turnover Ratio
Again, compare this number to previous years figures. If it’s trending down, we would recommend implementing stricter credit policies or turning to collections.
Send Outstanding Accounts to Collections
After a certain point, it becomes unlikely that you’ll be able to collect on accounts by yourself. While the exact time period before you should send to collections depends on the industry, it becomes less and less likely if your payments are already 30 days overdue.
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Don’t Know When to Send Accounts to Collection? We wrote a blog that can help you understand when you should send an account to a collection agency.
For Easy AR for 2023 and Beyond: Choose Rapid Collections
The right collection agency will do more than just get the job done, though. For a collections agency that will always keep your reputation in mind, turn to Rapid Collections. We protect and collect, so you’ll be able to have an ending balance in accounts receivable you can be satisfied with without worrying about your reputation. Contact us today to simplify your AR for 2023 and beyond.
