To calculate and compare net credit sales, you need to use a consistent time frame, such as monthly or the first quarter. This way you will decrease the number of outstanding invoices in your books which of the following represents the receivables turnover ratio? resulting in an increased receivable turnover ratio. Now that we have understood its importance, here are a few tips for businesses to tap in order to increase the receivable turnover ratio.
Since you can never be 100% sure when payment will come in for goods or services provided on credit, managing your own business’s cash flow can be tricky. That’s where an efficiency ratio like the accounts receivable turnover ratio comes in. Another factor to consider when interpreting the accounts receivable turnover ratio is the company’s customer base. If the company has a large number of customers who are slow to pay, it may negatively impact the ratio. On the other hand, if the company has a small number of customers who make up a significant portion of its sales and they pay quickly, it may positively impact the ratio.
Watch for trends in average collection period
Understanding and applying this formula provides valuable insights into the efficiency of accounts receivable management over a designated timeframe. In some ways the receivables turnover ratio can be viewed as a liquidity ratio as well. Since sales returns and sales allowances are outflows of cash, both are subtracted from total credit sales. The average accounts receivable is equal to the beginning and end of period A/R divided by two. Net credit sales are calculated as the total credit sales adjusted for any returns or allowances.
If you never know if or when you’re going to get paid for your work, it can create serious cash flow problems. Of course, it’s still wise to make sure you’re not too conservative with your credit policies, as too restrictive policies lead to loss of clients and slow business growth. Therefore, it takes this business’s customers an average of 11.5 days to pay their bills. An efficient and effective automated invoicing process will better the AR turnover ratio of any business. With streamlined invoice matching, the use of robotic process automation, and error-free processes, the right software can make a world of difference. Whether you use accounting software or not, someone needs to track money in and money out.
High receivables turnover ratios
It can sometimes be seen in earnings management, where managers offer a very long credit policy to generate additional sales. Due to the time value of money principle, the longer a company takes to collect on its credit sales, the more money a company effectively loses, or the less valuable are the company’s sales. Therefore, a low or declining accounts receivable turnover ratio is considered detrimental to a company.
