Answer to Question #307163 in Accounting for Jen

Question

You are the Accounting Manager for a company.You are analyzing your AR and you realize that the average collection period is lengthening every month, and this trend started 8 months ago.What specific action or steps would you take to (1) identify items that are potentially causing the collection time to increase and (2) reverse the trend and reduce the average collection time.

(1) What is DSO and how is it calculated?

(2) What is AR Turnover and how is it calculated?

(3) Identify ONE action/step you would take to identify the potential items causing the increase in your average collection period and 4 actions/steps you would take to reduce the collection time.

Answer 1

If your turnover ratio is decreasing, this means that your average collections are taking longer.

1.Set up a proper collection strategy to make sure every invoice get sent on in a timely matter, with clear payment terms.

2.Make it easier for them to pay by adding multiple payment options.

3.Offer incentives to encourage customers to pay early and impose penalties for paying late.

Days sales outstanding (DSO) is the average number of days it takes a company to receive payment for a sale.

DSO is often determined on a monthly, quarterly, or annual basis. To compute DSO, divide the average accounts receivable during a given period by the total value of credit sales during the same period and multiply the result by the number of days in the period being measured.

AR turnover is an accounting measure used to measure how effective a company is in extending credit as well as collecting debts. The AR Turnover Ratio is calculated by dividing net sales by average account receivables. Net sales is calculated as sales on credit - sales returns - sales allowances.