![]() 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. High Accounts Receivable Turnover RatioĪn increase in accounts receivable turnover ratio indicates that a company is efficient in collecting cash and has promptly paying customers.A high or a low receivable turnover tells us how quickly or slowly a company collects its receivables. The accounts receivable turnover is used to analyze how effective a company's revenue collection is, and that's why it's important. We’ll understand this in depth in the following sections. ![]() But if the customers are paying back within the policy time, the ratio is high, thereby contributing to a good accounts receivable turnover.Ī good accounts receivable turnover means that a business has a solid credit policy, an excellent due collection process, and a record of exceptional customers who pay their dues on time. With a 30-day payment policy, if the customers take 46 days to pay back, the Accounts Receivable Turnover is low. For instance, let's talk about Company A's payment policy itself.
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