The tool facilitates the computation of a financial metric. This metric assesses how efficiently a company collects its accounts receivable. It is derived by dividing net credit sales by the average accounts receivable balance over a specific period, typically a year. A higher result generally indicates a faster collection rate, which can improve cash flow. For example, if a business has net credit sales of $500,000 and an average accounts receivable balance of $50,000, the result would be 10, suggesting the company collects its accounts receivable ten times a year.
Its importance stems from providing insights into a company’s credit and collection policies. Effective management of receivables directly impacts a company’s liquidity and financial health. Historically, businesses relied on manual calculations, making the process time-consuming and prone to errors. This calculation tool simplifies this process, enabling businesses to quickly and accurately assess their performance.
