Also known as accounts
receivable turnover ratio the receivables turnover ratio is basically the ratio
between the total sales made with the help of credit and the average amounts
that are receivable. The receivables turnover ratio is calculated as follows:
Accounts ReceivableTurnover = Net Credit Sales / Average Accounts Receivable
The accounts receivable turnover
can be used to show the financial strength of a company to prospective
investors. The accounts receivable turnover
report demonstrates the average amount of time that passes before a payment is
received from each client, as well as showing an overall average for the entire
client base. While nobody expects the turnover to
match the exact terms of payment, many investors will consider it a big plus if
the accounts receivable turnover data indicates
an overall average of less than a week from the stated terms of payment.
A high accounts receivable turnover ratio shows an efficient business operation or tight credit policies or a cash basis for the regular operation.
A low or declining accounts receivable turnover indicates a collection problem from its customer. Also, there is an opportunity cost of holding receivables for a longer period of time. Company should re-evaluate its credit policies to ensure timely receivable collections from its customers.
It is important to note that the accounts receivable turnover ratio is an average, and averages can hide important details. For example, some past due receivables could be “hidden” or offset by receivables that have paid faster than the average. Looking at the company’s details, you should review a detailed aging of accounts receivable to detect slow paying accounts.
Komentarų nėra:
Rašyti komentarą