In our second example, we will use a different set of givens except for the average receivable balance of $12.567.67 per month.
This time we will calculate the ARTR for a small-scale business that extends credit sales. Total sales revenues for the year is $120,000 comprising COD sales amounting to $55,000 and credit sales of $65,000. We will presume that the Schedule of Monthly Balances in our image pertains to these sales figures.
To calculate the ARTR = $65,000 / $12.567.67
= 5.17 or 5 times
- The resulting ARTR indicates that there is a slow turnover or realization of cash at the point of collection.
- The $65,000 credit sales will need further analysis regarding the length of time by which credit is extended, since there are only 5 occasions that the credit sales recorded as receivables, assumed balances near the average receivable balance.
- This is also an indication that there are hardly any changes or movements in the AR ledger during each month.
Recommendations for Slow ARTR
The study and analyses of other profitability and activity ratios will further enlighten the business owner as to which aspect the slow turnover rate is attributable. Ratios like days receivable, inventory turnovers, and aging of accounts receivable, just to mention some, are used in conjunction with this analysis in order to pinpoint the potential causes of a slow ARTR.
Readers may refer to a separate article entitled Accounts Receivable Aging to find out how this tool will indicate that a slow turnover ratio may be due to collection inefficiency or poor credit management.