AAKASHAYA PATRA SEVEN STAR SMART EDUCATION SERIES PART – 59: 26.09.2020

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Financial Ratios =Management Efficiency Ratios

Last week we had seen details about some Management Efficiency Ratios like Total Asset Turnover Ratio, Inventory Turnover Ratio and Inventory Number of Days.


This week we shall try to understand the remaining two-Management Efficiency Ratios which are - Receivables Turnover Ratio and Days of Sales Outstanding.

Receivables Turnover Ratio:


The receivables turnover ratio is the ratio of Net Sales to the Average Accounts Receivable. Accounts Receivable Turnover Ratio = Revenue / Average Receivables This financial ratio indicates how many times in a given period of time, the company receives money from its debtors and customers. In other words, it shows company's effectiveness in extending credit and in collecting debts on that credit. Higher the ratio, better it is as a high number indicates that the company collects cash more frequently.

Days of Sales Outstanding: 

Days of Sales Outstanding (DSO) also known as Average Collection Period or the Day Sales in Receivables shows the average cash collection period for the company i.e., the time lag between billing and collection.

Both Receivables Turnover and the Days Sales Outstanding indicate the credit policy of the company.


Days Sales Outstanding = 365 / Accounts Receivable Turnover Ratio

Lesser the number of days, the better it is, as quicker the cash collected from the creditors, faster the cash can be used for other activities. 

A higher number indicates that customers are taking much longer time to pay their bills. This can be due to various reasons like - company is offering longer credit to customers to generate sales, products are sold to customers who are less credit-worthy, lot of competition in market, or customers are dissatisfied with company's products and services. 

If DSO has been on an increasing trend since last few years then it's a warning sign which needs to be thoroughly investigated before investing in such a company. 

Another important thing is that one should never analyse DSO values on quarterly basis as for seasonal business cycle companies DSO value during peak season and off season can be different altogether.

 

FOR MORE SUCH TYPE OF EDUCATION JOINT OUR ONLINE SERIES AND BATCHES AND BE A PRO TRADER CONTACT ON 7028 421 786.

 

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