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Accounts Receivable to Sales Ratio

What is the Accounts Receivable to Sales Ratio?

An indicator of a company’s ability to pay its bills is the accounts receivable to sales ratio – a liquidity indicator. You can measure what percentage of your sales are on credit using this ratio. 

Credit sales have their benefits, but they also lead to problems like bad debts, late payments, and limited financial investments. Stakeholders are very interested in knowing how much of the company’s revenue comes from these types of sales.

A higher proportion of credit sales might strain a company’s finances; more credit sales lengthen the time between the sale and any resulting cash flows. The corporation may only be able to meet its debt obligations if they are paid on time. You can gauge its liquidity, in part, by looking at its accounts receivable to sales ratio. Stakeholders should not rely just on this ratio, but rather use it in conjunction with other metrics.

Is it important to track your accounts receivable sales?

Tracking your accounts receivable sales is crucial as it directly influences your A/R sales ratio.

It affects your day-to-day operations and investment portfolio

It’s important to keep tabs on your A/R sales ratio so you know how much liquid cash your business has on hand. Your A/R sales ratio affects how you run your operations daily, and much more importantly, it affects when and how you make investments in your business. 

It can help you evaluate the effectiveness of your policies and procedures

The ratio also helps businesses identify whether their credit policies and practices are conducive to healthy cash flow and sustainable expansion. Your accounts receivable ratio is a key performance indicator that outlines your company’s capacity to collect accounts receivable efficiently. The A/R sales ratio also indicates the rate your customers repay their debts. Lower ratios typically indicate better turnover and steadier cash flow, though this varies by industry.

How to calculate the accounts receivable to sales ratio

Two numbers are factored into this ratio: outstanding invoices and overall revenue. Find these figures on your company’s balance sheet and income statement, respectively, and use them to calculate the A/R sales ratio. Divide your gross accounts receivable by your net sales for a specified period:

Accounts Receivable to Sales Ratio = Accounts Receivable ÷ Sales

If your ratio is low, this indicates that your company made fewer sales on credit for that period. If your ratio is higher, this indicates more sales by credit. A lower A/R sales ratio suggests that your company has a lower liquidity risk. 

Your Cash flow to sales ratio can affect your A/R Sales ratio

The cash flow to sales ratio indicates your company’s ability to generate cash flow in relation to its sales volume. You can calculate this ratio by dividing your operating cash flows by your total sales for a specific period.

Cash Flow To Sales Formula: Operating Cash Flows ÷ Net Sales

You want your cash flow to sales ratio to remain the same even as your sales improve. A drop in this ratio indicates multiple issues:

  • Your company is focusing on sales that are bringing in less cash than before.
  • By extending payment terms to new consumers, the company is tying up liquid assets in accounts receivable.
  • As the company’s sales expand, it must also raise its investment in overhead, which slows the rate of increase in cash flow.

All of these problems may point to the fact that a company is increasing sales while experiencing a decrease in cash flow. 

Is it important to track your accounts receivable sales?

Yes. Liquidity ratios allow stakeholders to measure a company’s efficiency in repaying debts when they arise. Usually, stakeholders prefer your accounts receivable to sales ratio to be low. It implies the company is efficient in recovering debts and generating cash flows. However, it is crucial to look at this ratio comparatively.

A realistic example: Apple’s 4th Quarter

Apple’s 4th Quarter 2022 filings are accessible on their website. As a technology company, they maintain a sizable accounts receivable amount for their inventory supply.

Apple posted quarterly revenue of $90.146 billion for September 2022. The company’s accounts receivables were $1.823B at the end of the quarter. Apply this information to our A/R Sales ratio formula:

Accounts Receivable to Sales Ratio= Accounts receivable September 2022/net sales September 2022

2.02227498%= $1.823B/$90.146 billion

As these things go, that’s a rather low ratio. To that end, it’s a good idea to look at what competitors in your field are doing. Apple keeps their accounts receivable to sales ratio low since their devices aren’t exactly sold through an exclusive dealer. As a result, they don’t allow their dealers to have credit accounts for extended timeframes.

Track your Accounts Receivable to Sales Ratio To Scale your business

Your accounts receivable to sales ratio establishes the portion of your business’ sales that are done on credit. Your ratio can help you evaluate the effectiveness of your policies and practices, and guide your day-to-day operations and investments.

To calculate your A/R Sales ratio, divide your net accounts receivable by your net sales. A lower ratio means a lower percentage of your sales are done on credit and you have low liquidity risk. Gaviti is a software solution for automating the collection of receivables, which boosts cash flow and efficiency. It can help you manage your accounts receivables to sales ratio and more.

 

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