Many banks will compute financial ratios to evaluate the liquidity of a company’s account receivables. When they do this they use what is known as the receivable turnover ratio. The ratio measures a number of times, on average, a company collects receivables during a period.
The formula for this ratio is:
_______________ = Accounts Receivable Turnover
To illustrate, let’s say your company reported in 2016 net sales of $500,000, its beginning and ending accounts receivable balances were $100,000 and $75,000, respectively.
($100,000 + 50,000) / 2 = 6.6 times, or every 55 days.
This information shows that the company is not successful in collecting outstanding receivables. The illustrated company should shorten the number of days to 30 days.
A company should also adopt an aging schedule. An aging schedule will help determine how long the receivables have been outstanding.
As part of services that we offer at A & C Bookkeeping Services, we provide an aging schedule to our customer and advise them of any red flags that need immediate attention. Please contact us today for your accounting needs.