An account receivable turnover ratio defines the ratio in the percentage of how much cash has been received on selling a company’s goods. This role is performed by the accounting team in an organization and this process is known as the AR process which is a bit tough to deal with those customers who have withheld payment. This process is done in a polite way to maintain the cash flow statement so that when analysts check, they find a good cash flow statement. The process starts from the collection of sold good payments from customers during the recovery period.
What account receivables turnover ratio shows?
The ratio tells the company how many times a company receives cash or cheque of provided goods in the past in the same year. It shows the company’s receivable strength to build its receivable accounts during the year. With the help of this ratio, it is the easiest way to find the recovery strength of the company and efficiency to collect the payments from customers at a given time. An efficiency shows by the visibility of higher accounts receivable turnover ratio and non-efficiency is shown by the visibility of lower accounts receivable turnover ratio. Due payments tell the recovery strength of the company and this is the only reason for their credibility becoming worse at one time.
What if ARTR is high?
If analysts and the firm’s management find a higher ARTR, it indicates that the collection power is great and their relation with customers is more compatible in terms of receiving debts. Higher ARTR also indicates the stability of the company at the time of collecting cash from customers.
Cash visibility also depends on higher accounts receivable turnover and it is possible when a company behaves strictly with customers for not paying debts at a given time. If you don’t do that, it could destroy the company’s credit report that is prepared at the end of an accounting period. Due to low potential customers, companies could bear with a lot of financial difficulties like not paying their debts on time or shortage of money to purchase assets for the company, or chances to lose permanent investors due to not paying interest on time.
What if ARTR is low?
If the analysts and firm’s management find a lower ARTR, it indicates that the collection power is poor and their relation with customers is less compatible in terms of receiving debts. A result from Lower ARTR could increase the financial burden on the company and shows how financially, companies are not able to perform a collection part.
Due to low potential customers, the company might face difficulties to improve their own credit reports and receive cash from credit sales.
Does accounting software help to improve account receivable turnover ratio?
With accounting software, due payments can be monitored and tracked automatically if all sales transactions are recorded with receiving time and date. The software will send a reminder message to all the customers whose payment is on credit, on the receiving date. Both cash and credit sales are recorded for future collection, half payment due are also recorded in the software. The reminder that is sent to clients is also for the company’s AR so that they also can interact with clients over the call, email, and on other sources. In case if clients are not eligible to pay the amount, then the company is entitled to get the client’s business product or assets back to cover their due amount.
Formula to calculate account receivable turnover ratio
The ARTR formula is, net credit sales are divided by Average account receivable
Net credit sales = credit sales minus return sales minus sales allowances (CS-SR-SA)
Average accounts receivable = Beginning AR + Ending AR is divided by a given time.
Process of accounts receivable turnover
The process of accounts receivable turnover starts from sending the invoices to customers to invoices paid by the customer. The invoices sent but payment not received is recorded as an account receivable on the balance sheet and the invoice paid is recorded as cash received on a balance sheet.
Account receivable in accounting is used for assets receivable that indicates to generate revenue and this process is done quickly to maintain the value of the company’s sales and its output.
Who calculates accounts receivable turnover ratio?
Analysts are the ones who are responsible to check the accounts receivable turnover ratio to check the company’s accuracy in the collection process. If they find a low ARTR, they will tell them to improve by sharing some tips by which customers can pay at a given time without making a payment delay. The Company’s management is also responsible to maintain the value of the assets by accepting due payments on time and being eligible to cover their short-term liabilities. Management has to balance their assets and liabilities to run the company by distributing assets and collecting debts from customers.
If analysts find higher ARTR, it indicates the company is failing to collect their debts from customers, their collection techniques are poor as well as poor in customer dealings. Lack of debt received indicates a reduction in the receivables turnover ratio.