Accounts Receivable
- Category: Finance
Accounts Receivable: A Vital Financial KPI
Accounts Receivable is a significant key performance indicator (KPI) that belongs to the Financial KPI category. It reflects the money that is owed to a business by its customers for goods or services provided on credit.
Accounts Receivable serves as an essential measure for financial analysts, investors, and business owners to gauge an organization's liquidity, operational efficiency, and credit policies. It represents a claim against the customers of a company, expected to be paid within a short period, typically 30-90 days. Hence, it is considered a current asset on a company's balance sheet.
Two primary factors involved in the calculation of this KPI are:
- Credit Sales: These are the total sales a business has made on credit.
- Collection Accounts: These accounts represent the total payments received from customers.
Calculation of Accounts Receivable
Similar to Accounts Payable, Accounts Receivable is typically listed as a line item on a company's balance sheet under current assets. However, changes in Accounts Receivable over a given period can be calculated as follows:
``` Change in Accounts Receivable = Accounts Receivable at the end of the period - Accounts Receivable at the beginning of the period ```
This calculation provides the net change in Accounts Receivable over the specified period. A positive result indicates an increase in Accounts Receivable, i.e., more credit sales were made than payments received. Conversely, a negative result shows a decrease in Accounts Receivable, i.e., more payments were received than sales made on credit.
Regular monitoring of this Financial KPI helps businesses in managing their cash inflows, understanding their short-term asset position, and planning their credit policies effectively. However, like all financial metrics, the interpretation of this KPI should be consistent with the industry norms and the specific conditions of the organization.
