Examples of Accounts Receivable Turnover Ratio
Imagine your company has $750,000 in net credit sales, $50,000 in accounts receivable at the beginning of the year and $60,000 in accounts receivable at the end of the year. Using the receivable turnover ratio:
$750,000 / (($50,000 + $60,000) / 2) = 13.64
This indicates that the business collects its receivables 13.64 times on average per year. This higher ratio signals an adequate ability to collect on your debts.
As another example, imagine a company has $30,000 in net credit sales, $5,000 in accounts receivable at the beginning of the year and $3,000 in accounts receivable at year end. By applying the account receivable turnover ratio, you find that:
$30,000 / (($5,000 + $3,000) / 2) = 7.5
This signifies that the business collects its receivables only 7.5 times on average per year. This lower ratio indicates the business should probably change its policies and practices to manage cash flow more effectively.
If your small business lets customers set up credit accounts, good tracking habits and accounts receivable management help you keep your accounts receivable turnover ratio high and your cash flow stable.
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