![]() is efficient in collecting its credit sales from customers, while a lower ratio may suggest issues with the company’s credit policies or collection process. ![]() A higher ratio indicates that OfficeFurniture Inc. To assess the company’s efficiency in managing its receivables, you can compare this ratio with industry benchmarks or competitors’ ratios. collected its accounts receivable every (365 days / 9.6) = 38 days. In other words, on average, OfficeFurniture Inc. is 9.6, which means that the company collected its outstanding receivables 9.6 times during the year. The Accounts Receivable Turnover Ratio for OfficeFurniture Inc. Next, calculate the Accounts Receivable Turnover Ratio:Īccounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable Accounts Receivable Turnover Ratio = $1,200,000 / $125,000 = 9.6 Net Credit Sales for the year: $1,200,000 Accounts Receivable at the beginning of the year: $100,000 Accounts Receivable at the end of the year: $150,000įirst, calculate the Average Accounts Receivable:Īverage Accounts Receivable = (Opening Accounts Receivable + Closing Accounts Receivable) / 2 Average Accounts Receivable = ($100,000 + $150,000) / 2 = $125,000 Here is the relevant financial data for OfficeFurniture Inc.: ![]() We will use the Accounts Receivable Turnover Ratio to assess the company’s efficiency in collecting its credit sales from customers during a given year. Let’s consider a fictional company called “OfficeFurniture Inc.” that sells office furniture to businesses on credit. Example of the Accounts Receivable Turnover Ratio It’s also important to use the ratio in conjunction with other financial metrics to get a comprehensive view of a company’s financial health and efficiency. Keep in mind that the Accounts Receivable Turnover Ratio does not consider cash sales it focuses solely on credit sales. Comparing the ratio with industry benchmarks or competitor companies can provide a better understanding of a company’s efficiency in managing its receivables. It’s essential to note that the Accounts Receivable Turnover Ratio may vary across industries. A lower ratio may indicate that the company has difficulties collecting payments, slow-paying customers, or issues with its credit policies. Average Accounts Receivable: The average of the opening and closing accounts receivable balances during the same period.Ī higher Accounts Receivable Turnover Ratio indicates that the company is efficient in collecting its credit sales from customers, implying that it has a strong credit policy and collection process in place.Net Credit Sales: Total sales on credit during a specific period, excluding cash sales, returns, and allowances.The formula to calculate the Accounts Receivable Turnover Ratio is:Īccounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable The ratio is also an indicator of a company’s credit and collection policies’ effectiveness. ![]() It measures how efficiently a company can convert its accounts receivable into cash during a given period. The Accounts Receivable Turnover Ratio is a financial metric used to evaluate a company’s effectiveness in managing and collecting outstanding credit and receivables from its customers.
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