Accounts receivable is an accounting line item that measures how much money a company is owed by its clients. Services may be rendered and products given to the customers, but they many not have been paid for yet. Accounts receivable is an important measure for any business, because it tracks these amounts and allows a business to know how much money is due to it. The accounts receivable turnover ratio is an accounting measure that helps quantify how effective a business is at extending credit to its customers and then collecting on those debts. This helps a business manage the cash cycle and helps the business become more efficient at using its assets. To calculate the accounts receivable turnover ratio, divide the net credit sales by the average accounts receivable. The formula for the accounts receivable turnover ratio uses the average accounts receivable figure to smooth the calculation over the time period that’s being analyzed. As an example, assume that a company has $750,000 in net credit sales, accounts receivable of $50,000 at the beginning of the year, and accounts receivable of $60,000 at the end of the year. The accounts receivable turnover is: $750,000 / (($50,000 + $60,000) / 2) = 13.64. Every business is different, and the value of this ratio can mean many things. In general, a lower accounts receivable turnover ratio means that a business is not so efficient at collecting the money that is owed to it. This signals that the business should change its policies and practices.
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