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Receivables turnover ratios
Receivables, like inventory, have holding costs
associated with them. A company and its management are evaluated by the
effectiveness of the collection process. The “receivable turnover ratio”
measures the number of times receivables turn over. The faster, the more
efficient a company is. The quicker profits turn into cash, the better.
Another way to look at the efficiency of the credit department is to monitor
the average number of days receivables are outstanding. The calculation
takes the number of days in the year and divides it by the receivable
turnover ratio. This is the inverse to the receivable turnover ratio, but
expressed in number of days outstanding.
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