Activity-Based Financial Ratio: Turnover of Accounts Receivable

June 9th, 2006 Comments off
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TURNOVER OF ACCOUNTS RECEIVABLE :

FORMULA

Net Sales / Accounts Receivable

MEASURE WHAT

Measure the efficiency or  otherwise of the credit and collection policies of the enterprise

SCORE/VALUE

Varies.

The higher is the more effective

SALIENT POINTS TO NOTE

Comparing similar periods and similar industry statistics determines measures of efficiencies by which the assets in this case Accounts Receivables are employed in the business.

Say, we have a Accounts Receivables turnover of 4 times, its means that this represent 360/4 =90 days’ credit taken by our customers. The faster the turnover of accounts receivable, it means that the company are collecting monies from the customers more faster.

This financial ratio forms part of the working capital cycle management or cash operating cycle of the business. With a higher turn of accounts receivables, more monies return into this cycle to enable the enterprise to pay its creditors who supplies the raw materials,etc.

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Financial Accounting

 
 

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