Which financial ratios are commonly used to assess AR effectiveness?

The Accounts Receivable Turnover Ratio and Days Sales Outstanding (DSO) are key financial ratios used to evaluate the effectiveness of accounts receivable management.

The Accounts Receivable Turnover Ratio measures how efficiently a company collects its receivables, indicating how many times, on average, the accounts receivable are collected during a period. A higher ratio suggests that the company is effective in collecting its receivables and thus managing cash flow efficiently.

Days Sales Outstanding (DSO) complements this by calculating the average number of days it takes to collect payment after a sale has been made. A lower DSO indicates that a company collects its receivables more quickly, which is beneficial for maintaining liquidity and operational efficiency.

In summary, these two ratios are essential in assessing how well a company is managing its accounts receivable, reflecting its ability to convert credit sales into cash.