Accounts receivable is a sale that occurs on credit to your customer. Your customers are required to pay for goods that have been purchased in terms of payment certain from 7 days, 15 days, 30 days, 45 days even up to 90 days. 

The length of term that has been determined by the management of the company also depends on the amount of existing receivables. The greater the value of the receivables, the longer it will take for debtors to pay them off and make the term value even higher. On the contrary, the smaller the value of the receivables, the shorter the time needed to pay them off, and the lower the term value will be.

The function of the accounts receivable turnover ratio is to determine the management of a company’s receivables in terms of its accounts receivable turnover rate, where accounts receivable turnover is the period for which working capital is tied to receivables. 

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The following is the Accounts Receivable Turnover Ratio: Accounts Receivable Turnover

Ratio = Net Credit Sales divided by Average Receivables The

higher the accounts receivable turnover value, the better. The faster the accounts receivable turnover also indicates that the business capital will return faster. The company’s accounts receivable turnover can describe the efficiency level of the company’s capital.

Meanwhile, to get Average Receivables, we must use the following formula:

Average Receivables = (Early Period Receivables + End Period Receivables) divided by 2

Accounts Receivable Turnover Ratio is a ratio that measures the ability and efficiency of a company in collecting its receivables, the higher this ratio. the better and more profitable. A higher ratio means that the company is successful in collecting receivables for the entire year. The higher efficiency is also advantageous from a cash flow point of view.

Purpose and benefits of accounts receivable turnover ratio

Several purposes of accounts receivable turnover ratio:

  1. Knowing how long the receivables were collected during a certain period.
  2. Knowing how much inventory on average is stored in the warehouse.
  3. Knowing the average collection of accounts receivable.
  4. Find out how many times the funds that have been invested in fixed assets rotate in one period.
  5. Knowing the use of all company assets with sales The

following are the benefits of the accounts receivable turnover ratio:

  1. Knowing how long the receivables can be collected during a period. You can also find out how many times the funds were invested during a period.
  2. Find out how many times the funds invested in working capital rotate in a period.
  3. Knowing the inventory stored in the warehouse.
  4. Know the amount of receivables that cannot be collected.

Example of calculating the accounts receivable turnover ratio:

It is known that company A has the following financial statement data: 

  • Net Credit Sales = Rp. 11M
  • Balance of Receivables Beginning of Year = Rp. 5.5M
  • Balance of Receivables at the end of the year = Rp. 5M

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Step 1: Calculating Average – Average Receivables:

Average Receivables = (Initial Receivables + Final Receivables) / 2

Average Receivables = (Rp. 5.5 B + 5 Billion) / 2

Average Receivables = Rp. 5.25M

Step 2: Divide Net Credit Sales by Accounts Receivable Average Accounts

Receivable Turnover Ratio = Rp. 10M / Rp. 5.25M

Accounts Receivable Turnover Ratio = 1.9x or 190%

Daniel Nugraha
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