Hence, we can say it is very important to maintain the quality of receivables.Īccounts receivable is the money owed by the customers to the firm these remaining amounts are paid without any interest. Accounts receivable are often used as collateral for loans. If a company is having a higher ratio, it shows that credit sales are more frequently collected vis-a-vis the company with a lower ratio. The accounts turnover ratio can also be used as an indication of the quality of receivables and credit sales. Availability of cash for the working capital, e.g., paying bills and other short-term liabilities. Higher efficiency is favorable as it provides a good liquidity position to the company. For example, if a company have an Accounts Receivables Turnover Ratio of 4, that means that the company is collecting its accounts receivable 4 times during the year (the company have a 90 Days cycle). Higher turnover ratios mean that the company is collecting the receivable more regularly in any financial year. The higher ratio is more favorable to business. It shows the ability of a business to collect its receivables. We can calculate Average accounts receivable as Average Accounts receivable = (Opening Balance + Closing Balance) / 2 Use of Accounts Receivables Turnover Ratio The money owed is against the goods or services bought by the customers on credit. It represents money owed by the customers to the company. Accounts receivable is a very important concept in business.
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