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Ratios for Receivables Analysis

April 13, 2006

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Accounts receivable represent sales for which payment has not yet been collected. If your business normally extends credit to its customers, the payment of accounts receivable is likely to be your single most important source of cash inflows.

The following analysis tools can be used to help determine the effect your business's accounts receivable is having on your cash flow:

• average collection period
• accounts receivable to sales ratio

An increasing average collection period could indicate that action should be taken to increase collection activities and to tighten your credit policy. For more on how to improve your collection activities, see our discussion of improving your collection cycle.

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