What is operating and financial leverage. How are they used?
The average collection period measures the length of time it takes to convert your average sales into cash. This measurement defines the relationship between accounts receivable and your cash flow. A longer average collection period requires a higher investment in accounts receivable. A higher investment in accounts receivable means less cash is available to cover cash outflows, such as paying bills.
The average collection period is calculated by dividing your present accounts receivable balance by your average daily sales:
Average Collection Period = Accounts Receivable Balance / (Sales/360) = 288,000 / (2,160,000/360) = 48 days
Leverage is used to explain a firm's ability to use fixed-cost assets or funds to magnify the returns to its owners. There are three types of leverage in financial management:
Operating, financial, and total ...
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