26
Apr
10

Collections Performance


For Entrepreneurs, collection of accounts receivable balances on a timely basis is an important contributor to cash flow. The faster the collections, the better the cash flow.

How do you measure your collection process? How do you know that it is working well and your company is continuously improving its collection efforts?

One potential metric is Days Sales Outstanding (DSO). If you calculate your monthly DSO and monitor the trend, you will see the efficacy of your collections efforts.

Ratio analysis can be used to tell how well you are managing your accounts receivable. The most common ratio for accounts receivable is turnover.  This ratio is calculated as follows:

Accounts Receivable Turnover = Credit Sales / Average Receivable Balance.

Example : Annual credit sales were $ 400,000, beginning balance for accounts receivable was $ 55,000 and the yearend balance was $ 45,000. The turnover rate is 8, calculated as follows: Average receivable balance is $ 50,000 ($ 55,000 + $ 45,000) / 2. The turnover ratio is $ 400,000 / $ 50,000. This indicates that receivables were converted over into cash 8 times during the year.

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