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Accounts Receivable Ratios
Ratio analysis can be used to tell how well you are managing your accounts receivable. The two most common ratios for accounts receivable are turnover and number of days in receivables. These ratios are calculated as follows:
Accounts Receivable Turnover = Credit Sales / Average Receivable Balance.
Example : Annual credit sales were $ 400,000, beginning balance for accounts receivable was $ 55,000 and the yearend balance was $ 45,000. The turnover rate is 8, calculated as follows: Average receivable balance is $ 50,000 ($ 55,000 + $ 45,000) / 2. The turnover ratio is $ 400,000 / $ 50,000. This indicates that receivables were converted over into cash 8 times during the year.
Number of Days in Receivables = 365 Days in the Year / Turnover Ratio. Using the same information from the previous example gives us 46 days on average to collect our accounts receivable for the year.
Two other ratios that can be used are Receivables to Sales and Receivables to Assets. Referring back to our first example, we would have a Receivable to Sales Ratio of 12.5% ($ 50,000 / $ 400,000). Remember ratios are only effective when used in comparison to other benchmarks, trends or industry standards. A turnover ratio well below the industry average would indicate much slower conversion of receivables than other companies. A much lower Receivables to Sales Ratio than the industry average might indicate much better policies in getting sales converted into cash.