POFM-accounts receivable turnover Flashcards
accounts receivable turnover ratio
measures how effective the credit policy of a business is and whether it is efficiently collecting in debts
It allows the business to see how quickly debtors (customers who have been granted credit) are paying their accounts and how quickly the accounts receivables are being converted into cash
The turnover ratio can be determined by dividing the credit sales by the average accounts receivable. If no credit sales are mentioned specifically, then assume all sales are credit
calculating accounts receivable turnover ratio
o this is written on average how many collection periods there are in a year of their accounts receivable and shows efficient they are at turning those debts in cash
accounts receivable turnover =
sales/accounts receivable
we can now calculate how long it takes the average debtor to pay for the products they have bought.
By dividing the ratio into 365, the business can determine the average length of time it takes to convert the accounts receivable into cash
the higher the receivable turnover ratio, the shorter the period of time between making a credit sale and conversion to cash.
turnover calculation on collection period
365/x = y
but what does this mean?
measures the relationship between the total revenue (or sales) and the debts you are owed from those sales
It allows us to make a judgement about how efficient the business is in collecting its debts and then using that money within the business on investments in technology, innovation or other purposes
A financial manager would want the ARTO ratio to be high in terms of collection period. That is, you would want to collect it more times throughout the year
Conversely they would want to see it lower in terms of days between collections. That is, you do not want to be waiting too long to collect your debts from customers
As with other ratios, comparison between other years and other business informs over assessment of efficiently
