![]() ![]() A lower average indicates that the company is collecting payments quickly, which is favorable for cash flow. The average accounts receivable represents the average amount of outstanding receivables during a given period. High net credit sales can be positive, but it also means the company is extending credit to its customers, and the efficiency of collecting on those sales becomes crucial. This figure reflects the company's ability to generate sales on credit terms. This suggests that ABC Electronics collects its outstanding receivables five times a year or every 72 days on average.Īverage Accounts Receivable = (Beginning Accounts Receivable + Ending Accounts Receivable) / 2 By dividing the total credit sales of the business by the average accounts receivable balance, the company's ART ratio is 5. Over the same period, the average accounts receivable balance was $1 million. In a given year, ABC Electronics generated $5 million in credit sales. Conversely, a lower ratio might indicate potential issues, such as difficulties in collecting payments or inefficient credit policies.įor instance, consider a theoretical company, ABC Electronics, that manufactures and sells electronic devices. ![]() It indicates how many times, on average, a company collects its accounts receivable during a specific period.Ī higher turnover ratio usually signifies that a business is promptly collecting payments from its customers, demonstrating a more efficient and effective credit and collection process. The accounts receivable turnover ratio is a prime financial metric that measures a company's effectiveness in managing its receivables. According to Mordor Intelligence, the account receivable automation market size will be USD 2.72 Billion in 2023and is anticipated to reach USD 4.76 Billion by 2028 at a CAGR of 11.84 %.Īccounts Receivable Turnover Ratio Explained
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