Thursday, January 12, 2017

OCC: Semiannual Risk Perspective

The OCC has just recently released a new Risk Perspective report (covering the Fall of 2016).  You may find it here.

Tuesday, January 3, 2017

Days Receivables Outstanding

Another way to look at accounts receivable turnover is in days:

Days Receivables Outstanding=                       365             
                                                        accounts receivable turnover

This ratio expresses the average length of time in number of days between sales and the cash collection of receivables.  The average number of days that receivables are outstanding can seem like a more intuitive measure than turnover expressed in number of times per year.  In this case, a lower value (or fewer days) is favorable because it represents more rapid turnover.

Accounts Receivable Turnover

Accounts Receivable Turnover=     annual net revenue
                                                            accounts receivable

Accounts receivable turnover represents the average number of times per year that trade receivables "turn over" or are converted to cash.  Higher, more rapid turnover is favorable, since sales on credit are being converted to cash more quickly.  Lower, less rapid turnover is unfavorable since default becomes more likely as receivables remain uncollected, and since conversion to cash is necessary to service obligations or to earn interest.

A problem with this ratio is the fact that it compares accounts receivable at a single point in time to an entire year of sales.  If the accounts receivable balance is unusually high or low on the date of the financial statements due to seasonal variations or other factors, then this measurement may not provide an accurate picture.  Substituting average receivable balances over the year in the denominator, may help correct this.