#Ar turnover ratio how to

High DSO and lax credit policies could mean a flawed process or errors.Does not take seasonal slumps or sudden sales spikes into consideration.Can dramatically change even when business is booming.Not only affected by payment terms, but also by quality of collections.Doesn’t give you the “why” behind the numbers.Could indicate credit lending policies are too lax or too strict (can be unclear).

#Ar turnover ratio how to

Want to improve your DSO? Download this eBook to understand how to enhance your collections process with automation Download Now Pitfalls of Receivables Turnover and Days Sales Outstandingīoth receivables turnover and days sales outstanding present a few glaring challenges that collection managers need to address for accurate reporting and financial forecasting. Don’t dip too low or too high, rather find a sweet spot that provides the necessary cash flow you need to grow. Set reasonable receivables turnover and DSO goals depending on your industry.

Low receivables turnover and high DSO means your process needs to be optimized.Ĭollections process optimization is a balancing act.

High receivables turnover and a low DSO means all receivables are returned on time.

You can get a good picture of how well your collections process is operating when you compare accounts receivable days from your receivables turnover vs. A lower DSO reflects faster cash collection. The goal here is a low days sales outstanding number. DSO calculation requires input of your ending accounts receivable for a given time period against the credit sales during the same timeframe.

How to calculate days sales outstanding is simple but important. Accounts receivable DSO is a daily average measurement that is often assessed annually.

Days Sales Outstandingĭays sales outstanding is a metric representing how long it takes your company to collect revenue from a client or customer after the sale. A higher receivables turnover ratio reflects a more efficient A/R department. The goal is a high receivables turnover ratio. Typically, accounts receivables turnover is measured as a ratio that compares your net credit sales against how many times you’ve collected receivables over a given period of time. It’s an indication of how well A/R handles extended credit and its process effectiveness. Receivables turnover measures the effectiveness of your company’s revenue collection. Both define different aspects of your accounts receivable performance, and both need to be tracked and optimized. Receivables turnover and days sales outstanding work in tandem.

Understanding Receivables Turnover and DSO Sometimes, automation of accounts receivable processes might be just what you need to accelerate your cashflow.

It’s important for collections specialists and managers to understand both receivables turnover and days sales outstanding and how they’re calculated. These two KPIs aren’t perfect, but they inform decisions that ultimately determine how much cash you have available. Two critical key performance indicators (KPIs) that help your accounts receivable team optimize collections are receivables turnover and days sales outstanding (DSO). The better you optimize collections procedures and tasks, the more efficient and effective A/R becomes. Optimizing your collections process is crucial for cashflow. Days Sales OutstandingĬashflow is the lifeblood of any business, and accounts receivable (A/R) turnover is the heart that keeps cash flowing.