The accounts receivable turnover ratio is an important metric - but it’s still hypothetical and leaves room for assumptions. It could also be due to lenient credit policies where the company is over-extending credit to customers with more risk of default. It indicates that customers are defaulting and the company needs to optimize collection processes. On the other hand, a restrictive credit policy might drive away potential customers or limit business growth, negatively impacting sales.Ī low accounts receivable turnover ratio or a decrease in accounts receivable turnover ratio suggests that a company lacks efficient collection strategies to collect receivables on time. A benefit of having a conservative credit policy is that businesses effectively avoid unnecessary loss of revenue by not extending credit to customers with poor credit history. It could also signify that a company has a pretty strict credit policy while offering sales on credit to its customers. High Accounts Receivable Turnover RatioĪn increase in accounts receivable turnover ratio indicates that a company is efficient in collecting cash and has promptly paying customers.A high or a low receivable turnover tells us how quickly or slowly a company collects its receivables. The accounts receivable turnover is used to analyze how effective a company's revenue collection is, and that's why it's important. We’ll understand this in depth in the following sections. But if the customers are paying back within the policy time, the ratio is high, thereby contributing to a good accounts receivable turnover.Ī good accounts receivable turnover means that a business has a solid credit policy, an excellent due collection process, and a record of exceptional customers who pay their dues on time. With a 30-day payment policy, if the customers take 46 days to pay back, the Accounts Receivable Turnover is low. For instance, let's talk about Company A's payment policy itself.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |