how do you monitor inventory and accounts receivable?

Expert Solution

Account receivable and inventory are the major part of working capital of a firm. The term working capital is commonly used for the capital required for day-to-day working in a business concern, such as for purchasing raw material, for meeting day-to-day expenditure on salaries, wages, rents rates, advertising etc. Working capital is needed till a firm gets cash on sale of finished products. It depends on two factor, manufacturing cycle and credit policy. There are many factors also which determine the working capital of a firm such as, Nature and size of the business, Firm’s credit policy, Firm’s production policy, Growth and expansion of business, Profit margin and dividend policy, Changes in the technology, Taxation policy, Infrastructural facilities etc.

Account receivable and inventory are the major part of working capital of a firm. Which can be monitored by using many ratios and clear accounts maintenance. Analyst uses ratios which help to measure how efficiently a firm paying its bill, turning inventory into sale and collecting cash from customers etc. account receivable turnover ratio and inventory turnover ratios are the important ratios used to monitor account receivable and inventory,

Account receivable turnover ratio

It measures how efficiently a firm is able to collect on the credit it extends to customers. Account receivable turnover ratio is calculated by dividing a firm’s sale by its account receivable. A firm is good at collecting on its credit will have a lower account receivable. It is also important to find out the day’s sale in receivable also. Days sales in receivables should mirror the company’s credit terms. It is also used to compare firm’s data for a several years and also other industry firm and industry average. The account receivable turnover ratio and days sales in receivables can be finding out using the following formula

Account receivable turnover ratio = net credit sale / avg. account receivable

We can find out the days sale by using the following formula;

Days sale in receivable = avg account receivable / (net revenue / 365)

Days of sale out standing

It is another important one can be used to monitor the account receivable. Days of sale outstanding (DSO) is a measure of the average number of days that it takes a company to collect payment after a sale has been made. The following are the formula to finding out days of sale outstanding

Days of sale outstanding = avg account receivable / avg daily credit sale

Inventory turnover ratio

Inventory turnover ratio is calculated by taking the cost of goods sold divided by inventory. Inventory turnover ratio measure how efficiently a company turn its inventory into sales. A lower inventory turnover ratio indicate that a company is quite efficient at selling of its inventory. We can use the following formula to finding out inventory turnover ratio.

Inventory turn over ratio = cost of goods sold / average inventory

Average inventory = (opening stock + closing stock) / 2

Days of sale of inventory

Days of sale of inventory is a financial ratio that indicates the average time in days that a company takes to turn its inventory. It also includes work in progress. The following are the formula to finding out days sale in inventory

days sale in inventory = inventory / ( cost of good sold / 365)

thes above are the common ways to monitor account receivable and inventory

jeff jeffy answered 1 year ago

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