AP/AR Turnover Ratio:
ACCOUNTS RECEIVABLE TURNOVER RATIO:
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Net Sales |
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1,336,454 |
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9.1 |
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Accounts Receivable |
146,281 |
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The Accounts Receivable Turnover indicates how many times the accounts receivable are being paid and re-established during the accounting period. The higher the turnover, the faster the collections.
To determine the number of days' sales that are in accounts receivable, take the ratio derived and divide it into the number of days in the accounting period. For example, since this is a year, we will use 360 days divided by 9.1, which indicates we have approximately forty days' sales in accounts receivable. This is a healthy rate. Most small companies have from sixty to seventy or more days' sales in accounts receivable. What is yours?
The collection of accounts receivable is critical. Keep a close eye Âon this ratio. If it begins to indicate that collections are slowing down and the ratio is increasing, take strong action to improve the company's collection policies.
ACCOUNTS PAYABLE TURNOVER RATIO:
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Purchases |
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792,362 |
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8.4 |
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Accounts Payable |
94,272 |
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The Accounts Payable Turnover indicates the number of times accounts payable will be paid during the year. To determine the number of days a business will take to pay its bills, divide the amount indicated, 8.4, into the number of days in the accounting period. As our example is one year, we will use 360 days, thus indicating that the accounts payable are being paid every forty-three days.
If you look at the accounts receivable turnover�the example indicates forty days�compare this to the accounts payable turnover, which is every forty-three days. You can see that the company is paying its bills more slowly than it is collecting its accounts receivable. In effect, the company is borrowing from its suppliers to expand its working capital.
These analyses are intended to help you understand financial state-ments. As your business becomes more sophisticated and your statements become more complex, ask your accountant for help. You should be well prepared to discuss their meaning.
Source: Harvey A. Goldstein, CPA , Granville Publications