Ratio of receivables to current assets

This query is : Resolved 
 

(Querist)
17 November 2010

SIR
Here is one term along with its definition

Ratio Of Receivables To Current Assets:
Receivables as a percentage of current assets would reveal the size of receivables in current assets and the opportunity cost associated with it, higher the percentage and higher is the cost of carrying the receivables.It is therefore desired that a firm needs to carry the least percentage of receivables as possible without affecting the sales volume

Can you please help me in this with example?? Please


CA Gunjan Kedia (Expert)
19 November 2010

hi pushkar,
here's ur answer:

Ratio of receivables to current assets =
(Receivables)/(Current Assets)
for example, if the total current assets are 100 and receivables are 20, then the ratio will be 20/100 = 0.2
this means that 20% of the current assets are receivables.
we know that funds that are employed in the business carry an opportunity cost. hence if this ratio is very high, it means that the credit policy of the business may not be sound, too much money is locked up in the receivables. if this money were not locked up in the receivables, it could have have been invested elsewhere to earn a return, or may have been repaid to the financier (in case working capital is borrowed).



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