Sample interview questions: Can you explain your approach to evaluating a borrower’s accounts receivable turnover and days sales outstanding?
Sample answer:
Evaluating Borrower’s Accounts Turnover and Days Sales Outstanding
Accounts Turnover
- Definition: The number of times a company sells and replaces its inventory during a specific period.
- Formula: Accounts Turnover = Net Credit Sales / Average Inventory
- Assessment:
- High accounts turnover: Indicates efficient inventory management and rapid cash flow, enhancing liquidity.
- Low accounts turnover: May suggest inventory buildup or inefficient operations, potentially tying up cash.
Days Sales Outstanding (DSO)
- Definition: The average number of days that it takes a company to collect on its credit sales.
- Formula: DSO = [(Beginning Accounts Receivable + Ending Accounts Receivable) / 2] / Credit Sales
- Assessment:
- Short DSO: Indicates efficient credit collection and a strong working capital position, freeing up cash.
- Long DSO: May suggest payment delays, credit risk, or inventory issues, negatively impacting liquidity.
Comprehensive Evaluation
- Trend Analysis: Examine historical accounts turnover and DSO trends to identify any patterns or red flags.
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