![]() A high ratio can also indicate that a company primarily operates with cash transactions or has conservative credit policies.Ĭonversely, a low receivables turnover ratio can suggest that a business has inadequate collection processes, poor credit policies, or serves customers who are not financially viable or creditworthy. Since the XYZ Company has a 30-day payment policy, their average collection time falls within their established window.Ī high receivables turnover ratio may indicate that a company efficiently collects accounts receivables and that its customers promptly settle their debts. To calculate this, divide 365 days by the ART ratio. This will tell you whether customers actually pay within the terms you’ve set on average. A higher ART ratio for the ABC Company might make it a safer investment than the XYZ Company.Įvaluating the actual number of days required to collect receivables is also beneficial. For instance, when investors consider the XYZ Company, they could compare its ART ratio to that of its closest competitors. Keeping track of business-related events that could influence the ART ratio can also offer a clearer understanding of any changes.Īnother tactic to assess the AR process's efficiency is comparing it to competitors. Analyzing it monthly or quarterly and observing fluctuations will help you identify whether your AR and collections process is performing well. One method of examining your ART ratio is comparing it across different time periods. Analyzing it in combination with other data is best, as it can help evaluate the effectiveness of the AR and collections process. The ART ratio alone may not be sufficient in providing meaningful insight, as industries vary, and every business has unique terms for customer accounts. This is another reason to increase the visibility of this metric beyond your finance team and senior management. Aggressive sales tactics and a lack of effective customer vetting may be the root of the problem. You might think the accounting function is to blame when the AR turnover ratio is low or average. A high accounts receivable turnover ratio indicates a robust cash flow however, an excessively high turnover might indicate overly aggressive collection tactics that could deter customers and hinder sales growth. ![]() The efficacy of your write-off prevention effortsīy closely tracking this performance indicator, you can uncover weaknesses and potential improvement opportunities within your accounting practices and within your sales and customer assessment methods. ![]() ![]()
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