![]() ![]() However, a restrictive credit policy may limit business growth and negatively impact sales. This could also be due to a conservative credit policy where the company avoids extending credit to customers with poor credit history to prevent unnecessary loss of revenue. It suggests that the company’s collection process is effective, and they have a high-quality customer base. Let’s explore these scenarios in detail: High AR Turnover Ratio:Ī high AR turnover ratio indicates that a company is efficient in collecting cash and its customers are paying promptly. This would suggest that the company needs to improve its collection process or adjust its credit policy to ensure that customers pay on time.Ī high or a low AR turnover tells us how quickly or slowly a company collects its receivables. If Company A has a strict payment policy of 30 days, the accounts receivable turnover days indicate that customers are paying late. This means that, on average, it takes customers nearly 46 days to repay their debt to Company A. So, for Company A, the accounts receivable turnover in days would be 365 / 8 = 45.63. To do this, we can use the formula: Receivable turnover in days = 365 / AR turnover ratio. It’s also important to calculate the accounts receivable turnover in days, which indicates how long it takes customers to repay their debt. ![]() This means that Company A was able to collect its accounts receivable eight times during the year. Therefore, the accounts receivable turnover ratio for Company A would be $180,000 / $22,500 = 8. The average accounts receivable would be the sum of the beginning and ending accounts receivable divided by 2, which is ($20,000 + $25,000) / 2 = $22,500. The net credit sales would be the gross credit sales minus returns, which is $200,000 – $20,000 = $180,000. To calculate the accounts receivable turnover ratio, we need to divide the net credit sales by the average accounts receivable. The accounts receivable at the beginning of the year was $20,000, and at the end of the year, it was $25,000. In a year, the company had gross credit sales of $200,000, but there were returns of $20,000. Laura, the CEO of Company A, offers credit sales to her customers. Let’s take an example to understand how to calculate the accounts receivable turnover ratio.
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