Accounts receivable turnover indicates how frequently your business collects payments from customers on credit within a specified period.
It measures how efficiently your account receivables are converted into cash. The more times you collect money, the higher your cash collection. This article will provide an overview of what accounts receivable are and how to calculate them.
It is a financial metric to measure the efficiency of cash collection from credit sales. This turnover provides shareholders and potential investors with an idea of how fast credit sales will be converted into cash.
For example, your accounts receivable turnover ratio is 7 times. This means your company collects cash 7 times during the period.
You can easily calculate accounts receivable turnover. First, find the net credit sales. Then, divide it by average accounts receivable.
Net credit sales mean how much you earn from the credit sales. But you must subtract returns, allowances, and discounts from this figure.
Average accounts receivable is the total amount of accounts receivable from first to last for a specific year. Then, you divide the calculation by 2.
For example, your net credit sales are $200,000, and your average accounts receivable is $40,000.
Hence, accounts receivable turnover is 5 times (200,000 / 40,000).
This implies your business collects accounts receivable 5 times a year.
A higher turnover is always better. It means the company can collect the money more quickly. However, for most industries, the range is generally between 5 and 10.
However, a lower turnover can create a negative impression about the company.
They fail to collect cash from the credit sales on time. Their credit policies are not efficient enough to maintain a healthy cash flow.
Learn which factors affect the result of accounts receivable turnover.
Strong credit rules require customers to make timely payments. Companies can maintain a steady cash flow. But flexible credit policies may lead to a delay in cash collection. This can cause a poor cash flow.
Not all customers have the same payment habits. Some pay before the time, and some on time. A few may delay clearing the payment. Analyze your customer's payment behavior pattern before selling on credit. It is essential for bulk orders.
A higher number of sales means more credit sales. It will increase the accounts receivable but decrease the turnover ratio.
An economic crisis can affect customers' ability to clear credit payments. This may cause a delay in paying the money. It will lead to a lower turnover ratio. However, established economic conditions will lead to faster turnover.
A company must maintain a steady cash flow to collect money from customers. You should not delay too much. Otherwise, it will badly affect your business. We have discussed what accounts receivable turnover is and how to calculate it.
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