Accounts Receivable to Sales Ratio

The accounts receivable to sales ratio looks at your investment in accounts receivable in relation to your monthly sales amount. The accounts receivable to sales ratio helps you identify recent increases in accounts receivable. In contrast, the average collection period may only report accounts receivable information from the previous year, if that was the only information available to calculate it. Using monthly sales information, the accounts receivable to sales ratio can serve as a quick and easy way to look at recent changes in accounts receivable. The more recent information of the accounts receivable to sales ratio will quickly point out cash flow problems related to your business's accounts receivable.

The accounts receivable to sales ratio is calculated by dividing your accounts receivable balance at the end of any given month by your total sales for the month.

 Accounts receivable to sales ratio = Accounts Receivable Sales for the Month

 Dick's accounts receivable balance at the end of the previous month was \$15,000, and the total sales amount from that same month was \$10,000. Dick's accounts receivable to sales ratio of 1.5 is calculated as:

 \$15,000 \$10,000

Using the accounts receivable to sales ratio. At first glance, the accounts receivable to sales ratio might not seem like useful information. But, when you compute it each month and then look at the changes that occur as the months pass, the accounts receivable to sales ratio can signal potential problems in your cash flow. For example, an increase in your accounts receivable to sales ratio from one month to the next indicates that your investment in accounts receivable is growing more rapidly than sales. This is often one of the first signs of a cash flow problem.

My business is seasonal, how can I use the accounts receivable to sales ratio when sales fluctuate from one season to the next? A seasonal business experiences a large part of its annual sales in a particular part of the year. Comparing your accounts receivable to sales ratio to seasonal and nonseasonal months for the same year may provide you with misleading information because your business normally experiences a seasonal increase or decrease in the ratio. You can adjust your analysis by comparing your accounts receivable to sales ratio to the same month for the previous year or years.