How can a company assess the effectiveness of its accounts receivable policies?

A company can assess the effectiveness of its accounts receivable policies by analyzing key metrics such as days sales outstanding (DSO). DSO is a crucial measure that indicates how long it takes on average for a company to collect payment after a sale has been made. A lower DSO indicates that a company is collecting receivables more quickly, which is a sign of efficient credit and collection practices. An increase in DSO may suggest issues such as delayed payments from customers or ineffective collection strategies.

This metric allows companies to gauge their cash flow management, customer payment behavior, and overall efficiency in managing receivables. By closely monitoring DSO trends over time, businesses can identify areas for improvement and make necessary adjustments to their policies to enhance cash flow.

While other options like customer satisfaction levels, industry benchmarks, and reviewing financial statements can provide valuable insights into a company's overall performance, they do not offer the same direct linkage to the effectiveness of accounts receivable policies as DSO does. Metrics such as DSO give a more focused view on the timeliness and effectiveness of collections, which is central to accounts receivable management.