The Role of Commercial Banks In Liquidity Management
Due to increasing globalization in the world economy, a lot of multinational corporations today have their businesses spread out across several geographies. This creates several management problems for multinational companies. Not only do they have to struggle with the complexity of managing personnel and operations in many countries but they also have to ensure proper […]
Estimating Future Dividends
We have discussed various types of dividend payout models. We have discussed the Gordon growth model, the H model, one stage, two stage, multi-stage and even spreadsheet models. These models are varied in their approach towards calculating the value of a firm. Yet the common link amongst these models is the fact that they all […]
Fixed Asset Turnover Ratio
Fixed assets i.e. property, plant and equipment represent the single largest investment any company makes in its operations. It is therefore important that a company keeps a close eye on whether these investments are performing well and generating adequate revenue and profit to justify the expenditure. While it is impossible to come up with a […]
How are Broadcasting Rights Revenue Split Amongst Franchises?
In the previous article, we have already seen the importance of broadcasting revenue. We also know what the shortcomings of broadcasting revenue are. However, in this article, we will have a closer look at a bigger problem which is how the revenue generated by the sale of broadcasting rights should be split between various stakeholders. […]
Bielard, Biel and Kaiser (BBK) Model
The main criticism of the Barnewall model was that it only classified investors into two types. This created an oversimplification. Practitioners of behavioral finance wanted the classification to be more accurate and inclusive. This is the reason why they started creating another psychographic model. This model is called the Bielard, Biel, and Kaiser model, i.e., […]
Accounts receivable are a very important part of the current assets of any business. Like inventory, accounts receivable are considered a necessary evil to do business. Large companies hardly conduct any transactions on cash basis with their wholesalers and distributors. The transactions are largely conducted on credit and therefore lead to the existence of accounts receivable on the balance sheet.
Accounts receivable are a dangerous item. If the firm is taking too long to collect the accounts receivable, it means that the firm is not utilizing its capital in the best possible way. Buyers are using the firms interest free credit and making delayed payments to the firm which has to arrange for working capital at a cost. Also the older accounts receivable become, the less likely they are to be collected. Hence, accounts receivable turnover ratio is a closely watched number.
Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable*
Average Accounts Receivables = (Beginning Accounts Receivables + Ending Accounts Receivables) / 2
This formula converted to a percentage shows the average amount of receivables that the firm has at any given point of time. Let’s say the answer was 27%, it would mean that on an average the firm has 27% of its receivables outstanding at any given point of time.
The number of days of receivables outstanding is considered by many to be a different ratio when in reality it is just an extension of the same ratio. In the above case we have reached an answer expressed in terms of percentage. All we need to do is to convert the answer to the number of days. Lets use the above example to understand how the number of days is calculated.
Number of Days Receivables Outstanding = (27 / 100) * 360
*For the purpose of calculation of ratios accountants assume that the year has 360 days.
The answer to the above is 97.2 days. The firm therefore turns over its receivables every 97.2 days. This means that the old receivables are replaced by a new set of receivables every 97.2 days. Therefore in 360 days, the receivables are turned over (360/97.2) 3.7 times.
The accounts receivables ratio is a good indicator of the bargaining power that a firm has amongst its buyers. If the firm has good bargaining power, there will be less receivable outstanding and the turnover will be higher.
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