Accounts receivable need to be monitored very carefully. Once a receivable reaches 30 days past due, every effort should be made to collect it immediately, and that effort should be made by an owner or manager, not an inexperienced clerical employee. Receivables 60 days old and older have no collateral value because they are so difficult to collect. We measure our efficiency in collecting our receivables by computing the accounts receivable turnover ratio and comparing it to the industry standard. We generate this ratio by dividing annual credit sales by monthly average accounts receivable.
Inventory is another asset which requires careful monitoring.
We need to make sure that we have enough of the right kinds of materials and merchandise to satisfy our customers and achieve our goals, but we also want to make sure that we don't have scarce resources tied up in more inventory than we need or in inventory that isn't moving. The inventory turnover ratio is our efficiency measure, and it is computed by dividing the cost of goods sold by the average monthly inventory. The fixed assets section of the balance sheet includes such categories as vehicles, equipment, fixtures, buildings, and land. This is the capital that we have invested in productive capacity for our business. We need to make sure that this section truly reflects the value and scope of our fixed assets.