Adjustment Mechanisms in Publich-Private Partnership (PPP) Contracts
A contract is said to be well formed if it is able to cover all the possibilities and provide guidance about what will happen in each and every situation. However, this benchmark cannot really be applied to PPP contracts used for building infrastructure projects. This is because infrastructure projects are extremely long term in nature. […]
Quick Ratio – Meaning, Formula and Assumptions
The quick ratio is a variation of the current ratio. However, a quick ratio is considered by many to be a more conservative estimate than the current ratio. This characteristic fetches it the nickname of being the “Acid test ratio”. The difference between the current ratio and the quick ratio is the fact that quick […]
Pre-IPO Investing
An initial public offer (IPO) is a method of selling securities wherein the entire lot of securities is offered for sale to the general public. An IPO is often used by companies when they want to sell their securities to smaller investment organizations and even retail investors. In the past few years, IPOs have seen […]
The Importance of Forex Education
Some Forex traders fail because they try to run even before they can walk. You may be passionate about trading Forex, but that does not mean that jumping headfirst into the trading will do you any good. Like all other professions, Forex needs training too. A period of theoretical education followed by a period of […]
Advantages of Banking as a Service
In the previous articles, we have already studied open banking as well as banking as a service. Many people tend to get confused between the two and think that both the terms refer to the same business model. However, this is not the case. Open banking is more of a technical term that is used […]
Accounts receivable are a very important part of the current assets of any business. Like inventory, accounts receivable are considered a necessary evil to do business. Large companies hardly conduct any transactions on cash basis with their wholesalers and distributors. The transactions are largely conducted on credit and therefore lead to the existence of accounts receivable on the balance sheet.
Accounts receivable are a dangerous item. If the firm is taking too long to collect the accounts receivable, it means that the firm is not utilizing its capital in the best possible way. Buyers are using the firms interest free credit and making delayed payments to the firm which has to arrange for working capital at a cost. Also the older accounts receivable become, the less likely they are to be collected. Hence, accounts receivable turnover ratio is a closely watched number.
Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable*
Average Accounts Receivables = (Beginning Accounts Receivables + Ending Accounts Receivables) / 2
This formula converted to a percentage shows the average amount of receivables that the firm has at any given point of time. Let’s say the answer was 27%, it would mean that on an average the firm has 27% of its receivables outstanding at any given point of time.
The number of days of receivables outstanding is considered by many to be a different ratio when in reality it is just an extension of the same ratio. In the above case we have reached an answer expressed in terms of percentage. All we need to do is to convert the answer to the number of days. Lets use the above example to understand how the number of days is calculated.
Number of Days Receivables Outstanding = (27 / 100) * 360
*For the purpose of calculation of ratios accountants assume that the year has 360 days.
The answer to the above is 97.2 days. The firm therefore turns over its receivables every 97.2 days. This means that the old receivables are replaced by a new set of receivables every 97.2 days. Therefore in 360 days, the receivables are turned over (360/97.2) 3.7 times.
The accounts receivables ratio is a good indicator of the bargaining power that a firm has amongst its buyers. If the firm has good bargaining power, there will be less receivable outstanding and the turnover will be higher.
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