AR turnover ratio of 10 implies that a company could collect its receivables 10 times in a specified period. To gauge how effective an AR team is, you can analyze DSO along with the AR Turnover Ratio. To understand a company’s financial health better, AR managers should analyze the accounts receivable turnover ratio along with a few other parameters. While this metric could state that a company’s credit policy might be too lax or conservative, it doesn’t elaborate the ‘why’ behind the numbers. 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.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |