Your friend owns a small business and she asks for your advice. For the past couple of years, her company has extended credit to its customers. She wonders how well her company manages its accounts receivable. During the most recent year, your friend's company had net credit sales of $743,000. Net Accounts receivable at the beginning of the year was $82,000. Ending net Accounts receivable was $77,000.

The company's credit terms are net 30.

What should you tell your friend regarding how well accounts receivable is managed?

Begin by calculating the business's accounts receivable turnover ratio for the year. (Round the accounts receivable turnover ratio to two decimal places, X.XX.)

Net credit sales / Average net accounts receivable = Accounts receivable turnover ratio

$743,000 / $79,500 = 9.35

With credit terms of 30 days, you would expect to have an accounts receivable turnover of approximately (5 ,8, 12, 15, 20). When comparing this number with the accounts receivable turnover ratio calculated in the preceding step, you should tell your friend that it appears that the company is not managing its accounts receivable very well.