Management accounting is used to improve the way a business flows, and it relies heavily on the financial information of the company. Management accountants use financial statements to calculate ratios, and the ratios are analyzed to find areas that need improvement. One area commonly investigated in businesses is accounts receivable. Here are two things to understand about accounts receivable (AR) and how to improve it to help your company operate more efficiently.
How To Measure Your AR Turnover
Using the AR turnover ratio is one of the best ways to measure how well your AR is working. This ratio will tell you how many times a year you collect your average AR. When you have a high rate, it indicates that your AR is working well, because it means you collect it often. When the number is low, it means you may need to take some steps to improve the way you collect money owed to your business.
To calculate this ratio, you must begin with the annual credit sales of your company. You must also know the AR balance at the beginning of the year and at the end of the year. With these numbers, you can calculate your ratio by adding the balance of AR at the beginning of the year and at the end of the year. You must then divide this amount by two to determine your average AR balance. Finally, divide your total annual credit sales by the average AR.
A ratio of around 10 is usually good, but the best thing to do is calculate this number often to have something to compare it to.
Ways To Improve Your AR Turnover Rate
There are a number of ways to improve this rate, and here are some tips that may help you with this:
Improving your AR turnover can help your company's cash flow. If you would like to learn about more ways to improve your company's financial state, contact an accounting firm in your area.
For professional accounting services, contact an accountant such as Dale K. Cline, CPA PLLC.Share