Answer to Question #307164 in Economics of Enterprise 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

(|) Average collection time:Time that passes before a company collects its account receivable.Items that causes collection time to increase include poor communication with customers regarding their debts and your expectations of payment.

(||) Reducing average collection time

-by passing postal delivery

-balancing payables and receivables

-enforcing collection policies

-statutory bank process

(1) DSO- Daily sales outstanding:This is the average number of days taken by a firm to collect payments from their customers.

DSO=(accounts receivables/Net sales)×Number of days.

(2)AR=Average revenue

AR=TR/Q

(3)Potential items causing the increase in average collection time include; poor communication with customers and lack of clarity on regarding one's expectation on debt.

Four actions that should be taken include:

- by- passing postal delivery which may consume time in between.

-balancing payables and receivable of an institution.

-Enforcing collection policies which may compel customers to comply earlier

-Statutory bank processes should be made easier for debtors to make their payment of their debts easier.