Wednesday, 18 January 2012

Accounts Receivables(AR) Analysis

Accounts receivable Turnover ratio Defination:
Accounts receivable Turnover ratio indicates how many times the accounts receivable have been collected during an accounting period. It can be used to determine if a company is having difficulties collecting sales made on credit. The higher the turnover, the faster the business is collecting its receivables. It can be expressed in many forms including accounts receivable turnover rate, accounts receivable turnover in days, accounts receivable turnover average, and more. A useful tool in managing and improving accounts receivable turnover is the Flash Report.

Accounts Receivable Turnover Meaning:
Accounts receivable turnover measures how efficiently a company uses its asset. It is an important indicator of a company's financial and operational performance. Many companies even have an accounts receivable allowance to prevent cashflow issues.

A high accounts receivable turnover indicates 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.

Accounts Receivable Turnover Formula:
A profitable accounts receivable turnover ratio formula creates survival and success in business. Phrased simply, an accounts receivable turnover increase means a company is more effectively processing credit. An accounts receivable turnover decrease means a company is seeing more delinquent clients. It is quantified by the accounts receivable turnover rate formula.

Accounts Receivable Turnover = Annual credit sales / Average accounts receivable.

Accounts Receivable Turnover Calculation:
Average Accounts Receivable is the average of the opening and closing balances for Accounts Receivable.
In real life, sometimes it is hard to get the number of how much of the sales were made on credit. Investors can use total sales as a shortcut. When this is done, it is important to remain consistent if the ratio is compared to that of other companies.
Example: assume annual credit sales are $10,000, accounts receivable at the beginning is $2,500, and accounts receivable at the end of the year is $1,500.


The accounts receivable turnover is: 10,000 / ((2,500 + 1,500)/2) = 5 times.

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