The content of the article
- What is accounts receivable
- Types of remote sensing when possible
- What is the analysis of DZ turnover for?
- Balance calculation formula
- How to calculate the turnover ratio
- DZ turnover in days
- How to find the maturity date of subsidiaries
- Normative indicator values
- Reserves for acceleration of turnover
To assess the work of the enterprise, you need to know the indicators of its business activity. One of them is the turnover of receivables (DZ). This coefficient shows the speed of converting goods or services into money. It helps determine the strategy for increasing the profitability of the company..
What is accounts receivable
An enterprise may provide goods or services to individuals and other companies on credit. DZ – the resulting monetary obligations of counterparties. Debt leads to loss of company income, because money from goods and services cannot be sent into circulation.
DZ is present in the financial statements. Assets are recorded in accounts No. 60, 62, 63, 68, 69, 70, 71, 73, 75, 76. Debts are summarized and reflected in line No. 1230 of the balance sheet of the enterprise. An exception is the amount in account No. 63. They bring in information about dubious arrears.
The composition of subsidiaries includes debts of the following counterparties:
- suppliers on advances paid;
- buyers for goods received;
- state funds for the return of overpaid contributions, taxes;
- employees who borrowed money;
- insurance organizations for payment of reimbursement;
- founders on contributions to the authorized capital.
Classification of RS by maturity:
- short-term – up to 12 months;
- long-term – 12 or more.
The optimal debt repayment period is 12-15 months. Short-term debt is classified as highly liquid assets. Forcibly collect her with a delay of 30–90 days. Long-term debt is a non-current asset of an enterprise that has a high risk of write-off for losses..
Types of remote sensing when possible
- Reliable. Customers make payments on time, there is material security.
- Doubtful. Unpaid debt receives this status when the buyer has not transferred the money within the period established by the contract. The company, by agreement, resorts to increase the amount of monthly payments or imposes penalties on the client.
- Unpaid on time and without collateral. Overdue debt is assigned to this category if fulfillment of obligations is not guaranteed by any assets..
- Hopeless. Such a group includes unrealistic debt collection. DZ recognize hopeless with the expired limitation period, by decision of the state authority on the impossibility of collecting money or because of the death of the debtor.
What is the analysis of DZ turnover for?
Economists calculate this figure to control counterparty monetary obligations. The DZ turnover ratio shows how many times a year, on average, a debt is converted into money. It is desirable that the indicator was not less than two. The increase in the parameter is considered a positive trend..
A decrease in turnover causes problems:
- decline in demand for products;
- decrease in average monthly turns;
- increase in the value of DZ.
An organization can increase the liquidity of receivables by:
- regular factor analysis;
- special control of DZ on large debtors;
- demand for outstanding debts;
- changing deferral resolution rules.
Balance calculation formula
The period of turnover of receivables in the analysis may be a year, quarter or month. Initial indicators are on the pages of the balance sheet, in the data of the Profit and Loss Statement.
The formula for determining KODZ (accounts receivable turnover ratio) according to the Balance:
KODZ = page No. 2110 / (page No. 1230 at the beginning of the period + page No. 1230 its end) x 0.5.
How to calculate the turnover ratio
This indicator reflects the ratio of the company’s revenue and the average value of subsidiaries for the year. The company’s need for working capital is higher, the smaller the ratio. For example, indicator 3 means that for a year the company has revenue three times more than its assets.
Turnover ratio formula
Ф = В / Со, where:
- With – average annual debt balance;
- AT – revenue for the year.
Formula for determining the average annual debt balance
Co = (D1 + D2) / 2, where:
- D1 – arrears at the beginning of the year.
- D 2 – debt at the end of the period.
To find out the share of goods and services sold on credit, the payoff ratio of receivables is calculated by the formula
SP = S / F, where:
- Sv – the average value of DZ for products.
- FW – revenue from goods and services.
DZ turnover in days
When analyzing the company’s liquidity, this parameter determines the average number of days that are needed to repay the debt. The turnover in days is calculated by the formula
ODZ = DP / F, where
- Dp – the length of the period, depending on the year or months;
- F – turnover ratio.
For example, the period is 180 days. The turnover ratio obtained in the calculations is 3. This means that the company will pay the debt in 60 days (180/3 = 60).
How to find the maturity date of subsidiaries
Companies evaluate their financial stability every 3-4 months. For this, the accounting department calculates the maturity of the subsidiaries by the formula
SDZ = (DZ x D1) / SDK, where:
- SDZ – average debt repayment period, money waiting period for products sold, days.
- DZ – the duration of the analysis period, days.
- D1 – debt of the debtor, rubles.
- KFOR – average annual sales revenue, rubles.
This indicator sets the liquidity of the enterprise. The longer the term, the lower the economic stability of the company.
Normative indicator values
There are no clear standards for this parameter. The duration of the turnover depends on the activities of the entire enterprise. A large ratio indicates a high rate of debt elimination. It is necessary to analyze the obtained values based on the characteristics of the organization. For example, when selling equipment on credit, the balance of DZ is high, and the coefficient is low, while the work of the enterprise is successful.
Reserves for acceleration of turnover
The effectiveness of the use of company funds depends on the ability to manage it, therefore, to accelerate turnover, it is necessary to implement the following measures:
- to increase the level of production;
- simplify settlements with counterparties;
- improve revenue collection;
- limit money at the box office, on the bank account;
- to fulfill the planned economic plans;
- control the flow of funds.
Ways to accelerate turnover associated with the modernization of production:
- Elimination of downtime and interruptions in work, reducing the duration of technological processes.
- Saving energy, fuel, raw materials.
- The introduction of advanced technology.
- Reducing the intervals between deliveries of goods.
- Increase in the volume of purchased raw materials and sales of products.
- Timely delivery of shipped products from the warehouse.
- Attracting more managers to quickly process orders.
- Logistics development, improving the organization of warehouse activities.
What is the formula to calculate accounts receivable turnover and how is it helpful in analyzing a company’s financial health?
What exactly does the term “accounts receivable turnover” refer to and how is it calculated? Can you provide any examples to help understand the concept better?
The term “accounts receivable turnover” refers to the efficiency with which a company collects payment from its customers on credit sales. It measures the number of times the company’s accounts receivable balance is collected or turned over within a given period. The formula to calculate it is: Accounts Receivable Turnover = Net Credit Sales / Average Accounts Receivable.
For example, let’s say a company had net credit sales of $500,000 in a year and its average accounts receivable balance during that year was $100,000. The accounts receivable turnover ratio would be 5 (500,000 / 100,000). This means that, on average, the company collects its accounts receivable balance five times in a year.
A higher accounts receivable turnover ratio indicates that the company is collecting its receivables more quickly, which is generally preferable as it improves cash flow and reduces the risk of bad debts. Conversely, a lower ratio may suggest inefficiencies in collecting payments or overly lenient credit terms. By comparing this ratio over time or with industry benchmarks, companies can evaluate their credit and collection policies and make necessary adjustments.