![]() Then, all credit sales are properly collected, and there is a small bad debt. ![]() Some companies have proper credit policies and required proper credit assessment. And nothing involved with the performance of the collection. This factor will highly affect the ratio. If those sales are on credit and during the credit period, the customers are not required to pay yet. Larges credit sales transactions at the end of the period: As well know, some business, there are larges sales transactions at the year-end.Here are the factors that you should consider when performing Accounts Receivable Turnover analysis: And it might not work because of the performance of the collection. Well, many factors affect the ratio to jump up and down. We can use the ending balance for calculation. In some cases, the business starts, and the period is shorter than one year. Related article How to Calculate Bad Debt Expense for Your Company? (Explained with Example and Entries) That means we take the average of the opening balance of AR at the beginning of the year and the ending balance of it at the end of the year. In some businesses, the customer made the payment by cash when purchasing, and in some businesses, sales on credit mostly happen.Īnother important element to calculate this ratio is Account Receivable. It depends on the nature of business and customers’ behavior. This is the total sales that the entity sells on credit during the year by excluding the sales that customers made by cash. The first important element is the Net Credit Sales. Understand the Formula:īefore going into detail, let start with the element that we use to calculate this ratio. The following are the details of the Accounts Receivable Turnover Ratio Analysis that deeply analyze the factors that affect the ratio, including credit policy, collection procedure, nature of business, and the importance of this ratio. However, a small ratio means there are large AR at the end of the period, and it is assumed to be bad performance in term of collection. High turnover generally assumes to be well performed. For example, the credit policy is good, and collection procedures are well performed. The high AR turnover ratio suggests many positive things that indicate the entity has well managed its AR. It uses to analyze the number of times that net credit sales during the period are collected based on the relationship between net credit sales during the period and averaged accounts receivable at the end of the period. Accounts Receivable Turnover is the efficiency ratio that directly measures the performance of receivable collecting activities over the year.
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