Business By Its Owners Debt Finance example essay topic

The strategic role of financial management Financial management refers to how businesses raise, use and monitor funds. It involves the processes of planning, monitoring and controlling the business's financial position and performance. Effective financial management will allow a business to maximise profits, increase the wealth of its owners and expand the business. Its strategic role is to give the business long term, big picture goals to aim for, as well as the specific objectives needed to reach these goals.

Financial reports are crucial for effective financial management. There are two main types of financial reports General Purpose Financial Reports (GPFRs) o Specific Purpose. Financial Reports (SPFRs) GPFRs are financial statements that all public companies are required by law to produce. They include the Balance Sheet ('Statement of Financial Position') -, the-Revenue Statement ('Statement of Financial performance) and the Statement of Cash Flows. GPFRs are the greatest insight many stakeholders have into the financial position of a business. These reports allow the business to be analysed over time and against other companies.

GPFRs are produced in accordance with Generally Accepted Accounting principles. SPFRs are financial statements, created by the business, to-be used by internal stakeholders such as management. They are more detailed than GPFRs and are only created at the instruction of management. They can be created for any purpose are not bound by regulations, determining- how, they should be produced.

Typical SPFRs include budgets, break-even, analyses and sales reports. SPFRs allow management to plan for the future, and compare actual and predicted performance. They are strategically designed to give management all the necessary information to maximise efficient decision making. When managing the finances of a business, there are a few key objectives that a business will try to achieve: Liquidity, Profitability, Efficiency, Growth, Return on Capital A business must try to balance each of these independent objectives and find the financial position that best suits its needs. Liquidity- measures the ability of a business to pay its debts as they fall due.

It is a useful indicator of the short-term financial stability of a business. Those assets that can be transformed into cash within a year, and thus contribute to the liquidity position of the business, are called 'current' assets. Current assets commonly include inventory (stock), accounts receivable (debtors), and cash. Effective liquidity management will ensure that the business has enough current assets to meet its obligations, without having to frequently sacrifice business opportunities. The stability of the external business environment will also influence a business's liquidity. When a business can predict its future cash flows with relative accuracy, it can maintain minimal excess cash reserves, instead using the funds for longer term investments and generating higher returns.

Profitability- relates to the earning potential of a business. Revenues are the returns generated by the ownership and use of assets. Revenues must outweigh the expenses (costs) associated with operating the business, or the business will be making a loss and will be forced to close. Profits created by a business will be used to reimburse the owners of the business and / or to create further opportunities for the business to grow.

To maximise profits, a business must examine all aspects of its operations in an attempt to maximise revenues and minimise costs. The objectives of profitability and liquidity often come into conflict. To balance the objectives of profitability and liquidity, a business must hold a range of assets balancing illiquid, high income-generating assets, with liquid assets that allow it to meet its financial obligations. Efficiency- is the ability of a business to maximise its output from its level of inputs. In order to achieve efficiency, managers must be committed to structuring the firm in a way that maximises productivity and minimises costs. Productivity is the output generated by each input into the production process, including capital and labour.

Growth- occurs when a business achieves a positive increase in the size of its operations. Growth can be in the form of increases in earnings, market-share or number and diversity of products. A business can achieve growth in two key ways: -internal growth occurs when a business uses retained profits to invest in projects that still only involve the business in question. external growth occurs when a business becomes involved with another business, and the two form one organisation. A merger occurs when two businesses agree to combine their assets. A take-over occurs when one business obtains a controlling interest in another business's shares.

A diversification occurs when a business merges with, or takes-over, a business in an unrelated industry. Methods of external growth are: Horizontal integration, which occurs when two businesses, offering similar products, combine. Vertical integration, which occurs when two businesses at a different levels in the production or distribution chain, combine. Return on capital- refers to the income generated by the business, relative to the capital invested in it. Each year, the original capital and retained profits from previous years are used to create further income. The profits from these new investments is the business's return on capital.

These returns are then distributed to the owners in the form of dividends, or kept for future business uses. Dividends are amounts of money paid to the holders of shares in the business. As stated previously, return on capital is not a discrete business objective. In order for a business to make strong returns on capital, it must operate efficiently and be profitable. By generating a profit, the business is creating a return on capital. Thus, return on capital is best viewed as a measure of profitability, rather than a discrete business objective.

The financial planning cycle READ OFF BOOK Australian financial markets Financial systems consist of markets and institutions that enable and encourage the flow of finds throughout an economy. Financial markets provide the means for the creation and exchange of financial assets. READ OFF BOOK ON PG 79 4 MAIN FINANCIAL MARKETS IN AUSTRALIA The major participants in financial markets are: Banks are the most dominant and recognised financial institutions in Australia. Banks facilitate the movement of excess funds in the economy (held in the form of deposits) to those who require funds, through all, manner of debt instruments. Since deregulation, many of the restraints previously placed on banks by the Reserve Bank of Australia (RBA) and the Australian Prudential and Regulatory Authority (APRA) have been removed. This has allowed banks to offer all range of financial services at market rates Finance companies supply credit to businesses and consumers.

As financial intermediaries, they are often categorised as non-depository institutions along with mortgage companies because they make loans without taking in deposits. Finance companies acquire the necessary funds to make loans by issuing short term promissory notes debt securities and asset-backed securities. They then re-loan this money to customers at higher rates of interest. Finance company loans are usually short to medium-term. Some finance companies are affiliated with manufacturers, allowing them to offer finance on the manufacturer's product to consumers at below market rates. Insurance companies guarantee the assets of their policy holders in return for a fee, ensuring that customers can continue to contribute to the economy even after a disaster.

Insurance companies are required by law to hold the assets of policy holders in special trusts. The funds in these trusts are then invested in a range of financial assets such as shares, property and debt. Insurance is a risk minimisation strategy for business. Merchant or investment banks operate largely in the wholesale sector of the financial system. These banks deal directly with large businesses and are not accessible to small businesses arid private borrowers...

Large businesses will use merchant banks to access capital markets for the issuing of equity shares, , the creation of debt securities for sale to the market, or the creation of various other securities in order to raise funds Merchant banks will not only act as an intermediary between the business and the market, but they will often also provide an 'under-writing's ervice where they guarantee the value of the required funds for the business should the market fail to purchase all the securities on offer. Merchant banks will also provide research services for large businesses and provide an advisory service on mergers and take overs Superannuation / mutual funds The introduction of compulsory superannuation in the late 1980's means that every Australian employee earning over $450 month from their employer must have an amount equal to 9% of their income paid as superannuation savings into an superannuation fund. Compulsory superannuation has been largely responsible for the strong growth of managed funds in Australia. Investors' funds will be used to generate returns by: o purchasing property o buying shares in domestic and overseas companies o investing in other lucrative assets. Mutual funds operate in the same way as superannuation funds, but the funds used are voluntary savings that can be withdrawn at any time.

Companies will require funds at particular times throughout the year. They can acquire these funds in financial markets by issuing equity or debt securities, or simple borrowing. A company's excess funds will be invested through financial markets in short-term interest bearing securities such as bank bills. Companies will also manage their financial assets in such a way as to insulate themselves against risks such as interest rate rises and to ensure they can meet their debt obligations.

Stockbrokers are a key intermediary in the financial system when it comes to trading financial assets, in particular equities. Stockbrokers facilitate the buying and selling of securities for their clients in the market, trading on behalf of individuals, companies, or for themselves The role of the Australian Stock Exchange (ASX) as a primary market The Australian Stock Exchange (ASX) was formed in 1987, shortly after the deregulation of the financial industry. The ASX was formed by the merger of six state exchanges, and is now the major financial exchange in the country. It comprises the largest primary and secondary markets for companies and individuals wishing to create and exchange financial assets in the economy.

The majority of transactions on the ASX are classified as secondary market transactions. However, the role of the ASX as a primary market is important for companies looking to raise funds. The two main ways a company can obtain primary market funds is by borrowing debtor selling equity securities. In short, if a business releases equity shares to the market, it raises funds in exchange for ownership shares in the company. If it releases debt to the market, it raises funds in exchange for regular interest payments on the amount borrowed, as well as the repayment of the original sum borrowed If a business wishes to use the ASX as a means of raising funds, it must first 'list' on the ASX. To do so, it must first fulfill a number of criteria: o Become a public company o Offer the public a chance to buy shares o Issue a prospectus that has been approved by ASIC If a company wishes to list on the ASX, and is not already a public company, this initial listing is called a 'float'.

A float is the initial public offering of shares in a company, changing its structure to a publicly owned company. The ASX sets out disclosure rules for all listed companies. The disclosure rules ensure that investors using the ASX can be certain that companies listed on the exchange are comparable by way of their financial statements, and that all relevant market information on the companies is available, allowing for efficient and informed investment decisions each time a company wishes to raise funds using the ASX it must issue a prospectus - a legal document detailing the intentions of the company to raise funds, and its current financial position. Primary market transactions on the ASX grew substantially during the late 1990's. Much of this growth was due to the sale of Telstra shares to the Australian public during 1997-2000. Financial market influences and trends.

Advances in technology have linked the majority of the world's financial markets, increasing the size, speed and efficiency of financial market transactions In Australia, there have been five main influences on financial markets, each with resulting changes to business. 1) The deregulation of the financial industry in the mid 1980's had an enormous impact on Australia's financial system. Deregulation saw the removal of numerous rules governing the operation of Australia's financial institutions, and the movement and ownership of financial assets overseas companies were allowed to list in Australia, and restrictions on capital movements in and out of Australia were removed, as were many restrictions governing the behaviour and structure of financial intermediaries The ease with which business could obtain finance became far greater, as funding could now also be sourced from overseas investors. This also increased the level of competition for some businesses, as overseas companies began to compete by establishing domestic operations. 2) The introduction of compulsory superannuation in the 1980's saw many Australians gain an indirect share holding through investments in superannuation funds. Compulsory superannuation saw the growth of managed funds in Australia escalate as millions of dollars of forced savings were invested here and overseas As a result, managed superannuation funds will continue to grow over coming decades and become an increasingly powerful source of funds for investment in the economy.

Compulsory superannuation has substantially increased costs for businesses. In a competitive labour market, businesses are not able to offer employees lower wages. Instead, businesses are forced to pay the additional burden of 9% superannuation payments on top of wages, 3) Privatisation is the sale of government owned businesses to the public. During the 1990's, the privatisation of a few key Australian icons such as the Commonwealth Bank of Australia, Qantas and parts of Telstra had an enormous impact on Australian financial markets. For business, privatisation has increased competition, and has often brought regulatory removals with it. Industries such as telecommunications have not only seen the partial privatisation of Telstra, but also the introduction of numerous competitors which, prior to a decade ago, was forbidden 4) The growth of technology around the globe facilitates the ease and efficiency with which financial transactions can take place.

An efficient financial system allows financial assets to be easily and quickly transferred between owners, so investors can find the best balance of risk and return for their financial situation and personal preference. Businesses have benefited dramatically from technological advances in recent decades. Technological advances mean increased productivity levels, lower business costs and the opening up of previously inaccessible markets. In 2000, 56% of Australian businesses had access to the internet, with 16% having their own website 5) Globalisation and the associated advances in technology have created a 24-hour market for financial assets. Financial assets in countries such as the United States can now be bought and sold in Australia with almost the same ease as a domestic transaction, The growth of internet trading and the merging of international financial markets means that Australia's financial system is ever more influenced by international markets, particularly markets in the United States.

Levels of investor confidence in international markets will often spread to Australian markets, resulting in almost predictable trends in the Australian share market, where large swings on major US share markets are copied in Australian markets the next day. Businesses are always going to need funds to operate. These funds can be obtained from inside the business (equity sources) or outside the business (debt sources). Internal funds come from within the business.

They may be capital contributions by the owners, or may come from the successful operation of the business. Owner's equity Is money contributed by people in exchange for ownership rights or 'equity share' in the business, making them part or full owners. When a business is established, the owners will contribute a certain amount of personal funds to the business to assist in starting up operations. If a business decides to list on the stock exchange and become a public company, it will be raising new funds in exchange for equity in the business. This first offering of equity shares to the public is known as an Initial Public Offering (IPO) or float. Retained profits When a business earns a profit, owners may be paid a percentage of this profit.

If the business is a company, profit shares paid to owners are known as dividends. However, not all of the profits are paid out to owners. Profits not paid as dividends, known as retained profits, will be reinvested into the business External funds come from outside the business. Short term borrowing Short term borrowing, such as overdrafts and bank bills, will be used by a business experiencing temporary liquidity problems or looking to invest in projects where the sum invested will be returned in less than six months. Overdrafts are agreements between a business and a bank, where the business is allowed to withdraw more money than is actually available in the business's cheque account.

An overdraft allows a business to pay creditors and wages when it is experiencing cash flow problems. overdraft is usually used when a business is confident that it its liquidity position will soon improve, although there is no time frame on when they must be repaid Bank bills have become an important business instrument for raising short-term funds. Bank bills are a short-term debt instrument where a business writes a bill to a bank, agreeing to repay the amount borrowed after a particular length of time (90 to 180 days), If the bank is satisfied the business will be able to repay the bill amount when the expiration date arrives, it will accept the bill for a fee These bills can then be traded on secondary markets Long term borrowing Long term borrowing allows a business to finance projects that are likely to last longer than a year Long term debt is, repaid over time in regular instalments Mortgages are long term loans, where the security for the loan is a piece of property. Mortgages can be used when purchasing a new piece of property, or a business can mortgage an existing, pre-owned piece of property. If the mortgagee (the business borrowing the money) is unable to meet its interest and principal payments each month, the mortgager has the right to take ownership of the property and sell it to regain any money owed.

Once the property has been sold and the mortgager has recouped any money owed, the remaining funds are returned to the mortgagee. Mortgages have lower interest rates than short-term debt instruments. Debentures are repayment guarantees, issued in return for a loan. The debenture, written by the business borrowing the money, guarantees the repayment of the funds at a particular date, as well as regular interest payments on the amount borrowed. Security on the debenture is provided by the business when issued, and can be fixed (on a particular asset or group of assets) or floating (on the assets of the business that are not already committed to other people).

The interest rate and length of a debenture are set by the issuing business, Debentures are costly to issue as the business must issue a legal prospectus giving financial information on the business to investors unattractive to small businesses Debentures are often issued by finance companies, with the funds then loaned out at a higher interest rate A lease agreement occurs when one party (lessor) buys an item and lets another party (lessee) use it for a cost. Leases are a tax-effective method of gaining access to assets, as lease payments are tax-deductible if the asset is used by the business to generate income There are two types of leases: Operating lease Lease term is shorter than the life of the asset (e. g., machinery will last for 15 years, but the lease is only for five years) Lessor is responsible for maintenance costs Lease payments are tax deductible Lessee can 'update' assets more easily b cancelling current leases for little cost and leasing new equipment Finance lease Lease term is equal, or close to, the life of the asset At the end of the lease, the lessee has the option to purchase the asset at a reduced; price Lessee is responsible for maintenance costs Expensive to cancel Factoring is the sale of accounts receivable (debtors) to a third party. every time a bill is printed it sends an extra copy to a factoring company which then pays the business an amount equal to the value of the debt, less a proportion as its fee. Customers must then pay the factoring company (instead of the business) for the goods and services provided, The obvious advantage of factoring to a small business is that payments are received immediately, eliminating a major source of cash flow problems. The only disadvantage is that the factoring company withholds a commission, sometimes up to 20%, which would otherwise be paid to the business. Trade credit is an agreement between a business and its supplier (s) to pay for products any time between the date of purchase and a specific time period thereafter. Venture capital is money provided by firms or individuals for investment in young, rapidly-growing companies that exhibit the potential to develop into significant business competitors.

Venture capital companies will most commonly purchase equity in these businesses, and their investment is usually considered to be long term. Venture capitalists invest in businesses that are considered high risk, are often in high risk industries such as mining start-ups or technology ventures. in return for accepting this high risk, they are hoping for higher returns than could be found through more widely accepted financial investments. Venture capital is a form of equity funding, as the venture capital company takes shares in the business Grants are funding packages provided to businesses from governments or other funding institutions where the business is not required to repay the grant funds. Grants are commonly given to industries or firms in order to further the creation of a product, which is seen as being in the interest of the nation as a whole Equity finance is capital contributed to the business by its owners Debt finance is funds borrowed by the business, which must be repaid (including interest) over a fixed period of time. These borrowed funds constitute liabilities for the business. Debt financing includes bank overdrafts, bank loans and mortgages.

Debt holders do not have ownership rights to the business. Instead, they have the right to liquidate the assets of the business (have the business cease trading and sell its assets) if it cannot meet its debt repayments at the agreed time periods. Advantages and disadvantages of equity financing Advantages Owners do not have to be repaid for their capital after a certain period, unlike debt which must always be paid over a period of time The rate of return on investments paid to equity holders is generally lower than for debt holders, partly because they are rewarded by the increase in the value of their share ownership Equity has lower risk Equity financing is better in weak external conditions, as there are no fixed obligations Disadvantages Dilution of control - if the number of owners increases, as happens with the floating of a business, then the power of each owner decreases Can take a long time to organise Equity financing adds additional costs to a business. Floating a company costs the business a large amount of money for legal and administrative fees. Also executives will need to spend additional time on shareholder relations Becoming a public company causes a business to adhere to specific disclosure requirements, which may place them at a competitive disadvantage to non-listed competitors Advantages and disadvantages of debt financing Advantages Debt financing is easier to arrange and generally can be organised on short notice Debt holders do not always have rights in the management of the business, hence management is able to make decisions with more freedom Debt can act like a'wolf at the door' for management.

The looming threat of debt repayments can act as an incentive for management to ensure adequate cash flow Directors do not have to answer to disgruntled shareholders over the state of the business as long as debt repayments are made Disadvantages Increased levels of debt mean that the company is at a higher risk of being liquidated should it fail to meet its commitments. Debt repayments must be met regardless of whether the business makes a profit or a loss Some debt holders may only issue debt that places restrictions on a business's actions. This puts a strain on the business's operations and decision-making Acquiring additional debt may send a negative message to the business's owners (i.e. that the business is experiencing cash flow problems) and thus cause a downward trend in the value of the equity Businesses remain exposed to the risk of sudden interest rate rises Gearing is a measure of a business's debt relative to its assets or equity. When a business is highly geared (otherwise known as highly leveraged), it has a high level of debt relative to equity. When a business has low gearing (or is not leveraged much at all) it will have less debt than it does equity funding its operations, and is thus relying on equity as its major source of funds A high level of gearing will expose the business to increased risk in an environment of uncertainty over interest rates and general economic conditions. Accounting gives the stakeholders of a business insight into its operations and financial well-being.

The aim of accounting is not only to produce reports, rather it is to provide stakeholders with the economic information necessary to make informed and efficient decisions. Accounting provides information for both these groups and a range of other stakeholders, helping the economy to allocate its scarce pool of resources as efficiently as possible. The accounting equation describes the relationship between a business's assets and liabilities. The accounting equation states that a company's assets equal the sum of its liabilities and owner's equity. Assets Liabilities + Owner's Equity Claims that come from external parties are represented by liabilities and claims from internal parties are owner's equity, This makes sense because owner's equity represents the owner's claims to the assets, once the liabilities have been subtracted (i.e. A - L = OE). The balance sheet is based on the accounting equation.

This makes sense because owner's equity represents the owner's claims to the assets, once the liabilities have been subtracted (i.e. A - L = OE). Assets are future economic benefits controlled by an entity as a result of past transactions or other past events, an asset is something of value to a business An asset can be tangible or intangible, current or not current, . An example of an intangible asset is a magazine name such as Sports Illustrated or Marie Claire Other intangible assets are copyrights, logos, trademarks, patents and goodwill, Liabilities are the future sacrifices of economic benefits that an entity is (presently) obliged to make to other entities, as a result of past transactions or other past events. Liabilities are claims on the business by external parties Contingent liabilities-a business may recognise that a future liability may occur, even if the necessary transaction or event has not yet occurred Owner's equity represents the residual assets of a business after deducting liabilities The Revenue Statement summarises the flows of revenues and expenses in and out of a business over a period of time, calculating the business's profit, It is also known as the Po Profit and Loss Statement or the Statement of Financial Performance, Profit is simply the difference between revenues and expenses.

Profit = Revenue - Expenses o If revenues exceed expenses (R E), the business is generating a profit and the wealth of the business is increased. o If revenues are less than expenses (R E), then the business is making a loss and net wealth falls. o Revenues refer to the income generated by a business from its operations. Income may come from sources such as: o Sales o Commissions o Rent on buildings the business owns Expenses refer to the costs incurred by the business in the course of operating. The most common types of expenses are: o Rent o Wages o Electricity o Advertising The Revenue Statement summarises the revenues and expenses of a business. Gross profit is equal to the total revenue of a business, less the cost of goods sold (COGS) in return for that revenue. COGS is calculated by adding together inventory purchases and inventory at the start of the year, and then subtracting any left over inventory from this figure. Net profit is equal to gross profit less expenses Gross profit - expenses = Net profit Revenue - COGS = Gross Profit The Balance Sheet (also known as the Statement of Financial Position) gives information about an entity's financial position at a particular point in time.

The Balance Sheet is based on the accounting equation A = L+ OE claims The Balance Sheet breaks assets (and liabilities) down further by classifying them as current or non-current: o Current assets (liabilities) - where the future economic benefits (losses) will be realised within the next 12 month e.g. Cash at bank (A) or accounts payable (L). o Non-current assets (liabilities) - where the future economic benefits (losses) are NOT likely to be realised within the next year e.g. Motor vehicles (A) or long term loans (L) The Revenue Statement affects the balance sheet by affecting the owner's equity account. The revenue statement explains how the balance sheet got from where it was at the end of the last reporting period. Australian Accounting Standard 28 requires all reporting entities to produce a Statement of Cash Flows. The Statement of Cash Flows provides information about the inflows and outflows of cash through a business over a year, and is useful for judging the solvency of a company.

Cash flows are normally classed into three categories: STUDY FROM BOOK PG 107 The Cash Flow Statement reports the change in a business's cash balance over the year by subtracting any cash payments (outflows) from cash receipts (inflows). The Cash Flow Statement is useful for monitoring cash balances and for assessing the entity's liquidity and ability to meet its obligations Ratios provide a snapshot of a business and allow us to compare trends over time and against competitors and are a good barometer of management performance. The four main categories of financial ratios relate to liquidity, solvency, profitability and efficiency, Liquidity ratios measure the ability of a business to meet its short term financial commitments (debts) when they fall due. Liquidity ratios measure the relationship between current assets and current liabilities. The current ratio (or the working capital ratio) is a short term liquidity ratio: Current ratio = This means that New Biz Solutions has 2 1/3 times as many assets as is needed to cover its short term obligations when they fall due over the next 12 months. A ratio of less than one would indicate that the business has insufficient current assets to meet current liabilities and it could be in danger of defaulting on its debt.

A current ratio that is relatively high suggests that the business has invested too heavily in short term assets and that it could be ignoring long term projects or opportunities that could be created by using short term debt to fund expansion. A ratio of 2: 1 or higher is preferred, Solvency refers to the financial structure of a business. Solvency ratios measure the extent to which the capital employed in a business has been financed either by shareholders (through share capital and retained earnings), or through borrowings and long term finance. They analyse a business's level of gearing. They indicate the ability of a business to repay its debts in the longer term as well as giving a strong indication of the financial health and viability of a business.

The debt-to-equity ratio is one of the most common measures of solvency, and is calculated by the formula: The debt-to-assets ratio is also a solvency ratio that gives an indication as to how high a business's level of debt is, relative to its assets: The debt-to-assets ratio indicates what proportion of a business is committed to external parties. A debt-to-equity ratio in excess of 50% means that the assets of the business have been more heavily financed by funds borrowed from outside the business than contributions from owners. Profitability ratios give a perspective to the level of profit generated by a business, by comparing profits with figures such as sales and owner's equity. Profitability ratios can be expressed as a "return" Thus, profitability ratios give us an indication of just how good the dollar profit is, relative to the size of the business Gross Profit Ratio The gross profit ratio expresses gross profits (revenues less COGS) as a percentage of sales: Gross profit 100 Gross profit ratio = X Sales Net Profit Ratio The gross profit ratio measures the operating efficiency of a business and its ability to generate profits out of sales. Even more useful for an analyst is the net profit ratio. Net profit ratio shows the proportion of each $1 of sales revenue that is returned as net profit.

The net profit ratio provides a good indication of how well a business is managing its operating expenses given its revenue streams. Return on owner's equity (ROE) is a popular ratio for measuring management performance. The return on owner's equity ratio indicates how much profit is generated by the business relative to the equity invested in it. It is a measure of how well management can use its funds to generate wealth for shareholders: Efficiency ratios look at how well the business is able to manage its operations to generate returns. The expense ratio shows us the expenses of a business as a proportion of total sales, giving an indication of how cost-effectively the business is able to generate its sales revenue Accounts Receivable Turnover Ratio Another efficiency ratio commonly employed by business is the accounts receivable turnover "ratio.

This ratio indicates how often a business turns over its debtors every financial year. It is calculated as:.