Final answer:
Accounts receivable should generally not exceed 10-15% of a business's average monthly gross income, although the ideal percentage can vary depending on the industry and the company's credit policies. Excessive accounts receivable could lead to cash flow issues and an increased risk of bad debts. Each business should establish its own policy based on industry standards and financial analysis.
Step-by-step explanation:
When managing a business's finances, one important aspect to consider is the ratio of accounts receivable to gross income. Accounts receivable represents the money that is owed to the business by its customers for goods or services already delivered. A standard benchmark for this ratio is not strictly defined, as it can vary significantly by industry, the terms of credit sales, and the business's credit policy. However, a commonly suggested guideline is that a business's accounts receivable should not exceed 10-15% of its average monthly gross income.
Excessive accounts receivable can indicate potential cash flow problems since sales have been made but the cash has not yet been received. This can impact the business's ability to meet its own financial obligations and can also increase the risk of bad debts. Therefore, businesses often strive to optimize their accounts receivable turnover ratio - a measure of how quickly a business can turn its receivables into cash. Efficient credit and collection policies can help maintain this balance, ensuring that the company is not overly exposed through its receivables.
It's important that each business reviews its industry standards, financial condition, and historical trends to establish an appropriate accounts receivable policy that supports healthy cash flow.