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The Accounts Receivable Turnover Ratio is a potent financial indicator reflecting a company's efficiency in issuing credit and collecting debts. It paints a broad picture of how well a company manages its accounts receivable and the liquidity of its credit. This article provides insights into measuring and optimizing the Accounts Receivable Turnover for improved financial management.
Accounts Receivable Turnover is a ratio illustrating how often a business collects its average accounts receivable balance within a set period. It's a measure of a company's effectiveness in extending credit and its ability to collect on that credit promptly.
A high Accounts Receivable Turnover indicates a quick collection of debts and efficient credit policies. Conversely, a low turnover can imply lax credit policies, ineffective collections—or that a company's customers are facing financial difficulties.
To calculate the Accounts Receivable Turnover:
Accounts Receivable Turnover = Net Credit Sales / Average Accounts Receivable
Net Credit Sales is the revenue from sales that were not for cash; Average Accounts Receivable is typically the sum of the starting and ending accounts receivable over a period, divided by two. If net credit sales are $1,000,000 and the average accounts receivable is $125,000, the turnover ratio is 8.
While industry specifics can cause significant variance in benchmarks, a higher ratio generally reflects robust credit and collection processes. Companies should strive for a turnover ratio that is at least as high as the industry norm.
Focusing on Accounts Receivable Turnover and deploying strategic initiatives for its advancement can lead to an accelerated cash flow and fortified overall financial performance.
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