Account receivable turns = credit sales (or total sales shown in income statement) / average account receivables
An example of account receivable:-
| H.F. Beverages Financial Statement Excerpt | ||
| 2009 | 2008 | |
| Accounts Receivable | $1,183,363 | $1,178,423 |
| Credit Sales | $15,608,300 | |
average account receivable = (1,183,363+1,178,423)/2 = 1,180,893
account receivable turns = 15,608,300 / 1,180,893 = 13.217
The average number of days that customers pay = 365 / 13.217 = 27.62.
If the collection deadline policy is 30 days term, then the company is doing good because customers pay within 30 days. Had the answer been greater than 30, you would have been wise to try to find out why there were so many late payments, which could be a sign of trouble. (Keep in mind you will need to read through the company's reports to find out what its collection deadline is. Not all companies require their customers to pay within 30 days).
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