126 ShowMetheMoney
(or total sales if those sales are not broken out separately) during a
period divided by the average accounts receivable outstanding during
the period:
Credit sales
(Beginning accounts receivableending accounts receivable)/ 2To gauge the spee dof receivables collection, in turn, divi de the
number of days in a year by the number of turns. The result gives
the average number of days the receivables are outstanding. Com-
pare that average to the business’s credit policies to see how well
managers are running the credit part of the business. There is trou-
ble if the average is greater than the policy (say, collections average
70 days but billing calls for payments to be made within 30 or 60
days).
GE displays considerable skill in receivables management, turn-
ing them about eight times per year, meaning they are collecte don
average within 45 days. That compares dramatically well to a con-
glomerate industry average of three turns, or 120 days. Microsoft is
also a speedy collector, turning receivables about 11 times a year, or
just over 30 days—perhaps as a result of its no-paper policy under
which all bills (an dinvoices) are complete delectronically—routing
a slower computer industry average that looks more like that of GE
(about eight turns, averaging 45 days).
Again, the exceptional case is Amazon.com, a standout in this
category, with about forty turns, or a mere nine days outstanding.
That means Amazon.com’s customers are funding a substantial part
of Amazon.com’s operations! They provide funds well ahead of the
company’s obligations to pay its creditors, particularly its suppliers,
whose trade terms extend up to 60 days.
Profit Margin
The key to business efficiency is the profit per dollar of sales, which
is calle dtheprofit margin. To calculate it, divide operating income
by the total net sales (i.e., sales after returns, discounts, and so on)
an dexpress the result as a percentage. (Two alternatives to this
standard profit margin calculation are also often made: A more
general one calledgross profit margin dividesgrossprofit on sales
by total net sales, an da more specific one calle dnet profit margin