Analyzing Credit Efficiency using Receivable Turnover Ratio

Do you sell products to consumers on credit?

Business receivables turnover must also be evaluated whether it is efficient or not. This is so that your cash situation also remains stable. How long will it take you to get your receivables?

Receivable turnover ratio? what's that

Accounts receivable turnover ratio is an accounting measure used to measure the effectiveness of a company in collecting its receivables or money owed by clients. The ratio shows how well the company uses and manages credit extended to customers and how quickly short-term debt is collected or paid off. Accounts receivable turnover ratio is also called accounts receivable turnover ratio. Accounts receivable turnover ratio can be calculated on an annual, quarterly, or monthly basis. This is the formula

Accounts receivable turnover ratio = net sales credit/average accounts receivable

Average receivables is Add the value of receivables at the beginning of the desired period with the value at the end of the period and divide the amount by two.

Net sales credit is the revenue generated from sales made on credit minus returns from customers.

High accounts receivable turnover

A high ratio can also indicate that the company is conservative in providing credit to its customers. A conservative credit policy can be beneficial because it can help companies avoid extending credit to customers who may not be able to pay on time. On the other hand, if a company's credit policy is too conservative, it can lead potential customers to turn to our competitors who will give them credit.

Low accounts receivable turnover

A low receivables turnover ratio may be due to a company that has poor collection processes, poor credit policies, or customers who are not financially viable or creditworthy. Typically, a low turnover ratio implies that a company must reassess its credit policies to ensure timely collection of receivables. However, if a company with a low ratio improves its collection process, it can lead to a cash inflow from collecting old credit or receivables.

So, actually there is no ideal measure of how much the ratio of receivables turnover, every industry cannot be equated the ratio. But for sure, the higher the efficiency, from a cash flow point of view, the more profitable it is

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