fbpx

What is an Accounts Receivable Analysis?

Accounts Receivable Analysis

Share This...

Accounts Receivable Analysis

Accounts receivable analysis is the process of examining a company’s outstanding accounts receivable to evaluate the effectiveness of credit and collection policies, assess the financial health of customers, and manage cash flow. The primary objective of this analysis is to identify overdue accounts, minimize bad debts, and optimize cash flow, which are critical factors for a company’s financial stability and success.

Accounts receivable analysis can involve several techniques, including:

  • Accounts receivable aging report: This report categorizes outstanding receivables based on the length of time they have been outstanding (e.g., 0-30 days, 31-60 days, 61-90 days, and over 90 days). By analyzing the aging report, a company can identify overdue accounts, prioritize collections efforts, and assess potential bad debts.
  • Accounts receivable turnover ratio: This ratio measures the efficiency of a company’s credit and collection policies by comparing its net credit sales to its average accounts receivable balance. A higher ratio indicates that the company is collecting its receivables more quickly, while a lower ratio suggests that the company may be struggling with collections or extending too much credit.
  • Days sales outstanding (DSO): This metric calculates the average number of days it takes for a company to collect payment from its customers after a sale has been made. A lower DSO implies that the company is collecting payments more quickly, while a higher DSO may indicate inefficiencies in the collection process or potential credit issues.
  • Percentage of bad debts: This metric calculates the proportion of accounts receivable that are written off as uncollectible compared to total accounts receivable. A high percentage of bad debts may indicate problems with credit policies or customer financial health, while a low percentage suggests that the company is effectively managing its receivables and collections.
  • Customer credit analysis: This involves reviewing individual customers’ credit histories, payment patterns, and financial health to assess their creditworthiness and adjust credit terms if necessary.

By conducting an accounts receivable analysis, companies can make informed decisions about credit and collection policies, improve cash flow management, and minimize the risk of bad debts. Regular analysis can also help companies identify trends, address potential issues, and enhance their overall financial health.

Example of an Accounts Receivable Analysis

Let’s consider a fictional company called “Healthy Foods,” which supplies organic food products to grocery stores on credit, with payment terms of net 45 days. Healthy Foods wants to perform an accounts receivable analysis to evaluate the effectiveness of its credit and collection policies and assess its cash flow management.

Here’s an example of Healthy Foods’ accounts receivable analysis:

  • Accounts receivable aging report:
CustomerAging CategoryOutstanding Amount
Store A0-45 days$20,000
Store B46-90 days$15,000
Store C91-135 days$5,000
Store DOver 135 days$2,000
  • Accounts receivable turnover ratio:

Net credit sales for the year: $450,000 Average accounts receivable balance: $50,000

Accounts receivable turnover ratio = $450,000 / $50,000 = 9

  • Days sales outstanding (DSO):

Days in the year: 365 Accounts receivable turnover ratio: 9

DSO = 365 / 9 = 40.56 days

  • Percentage of bad debts:

Total accounts receivable: $42,000 Bad debts written off: $2,000

Percentage of bad debts = ($2,000 / $42,000) * 100 = 4.76%

  • Customer credit analysis:

Healthy Foods reviews the credit histories, payment patterns, and financial health of its customers to assess their creditworthiness and adjust credit terms if necessary.

Based on this analysis, Healthy Foods can conclude the following:

  • The majority of its customers are paying within the credit terms (Store A), but there are overdue accounts (Store B, Store C, and Store D) that may require further follow-up or collections efforts.
  • The accounts receivable turnover ratio of 9 suggests that the company is collecting its receivables relatively quickly.
  • The DSO of 40.56 days indicates that the company is collecting payments, on average, within its credit terms of 45 days.
  • The percentage of bad debts (4.76%) may need further evaluation to determine if it’s within an acceptable range for the industry.

Using this analysis, Healthy Foods can make informed decisions about its credit and collection policies, address potential issues, and optimize its cash flow management. Regular accounts receivable analysis helps the company maintain its financial health and identify trends that may impact its business.

Other Posts You'll Like...

Want to Pass as Fast as Possible?

(and avoid failing sections?)

Watch one of our free "Study Hacks" trainings for a free walkthrough of the SuperfastCPA study methods that have helped so many candidates pass their sections faster and avoid failing scores...