Final answer:
The effectiveness of a company's collection efforts can be measured using metrics like the accounts receivable turnover ratio and days sales outstanding (DSO), which indicate the efficiency and speed of collecting money owed.
Step-by-step explanation:
A company's effectiveness regarding its collection efforts can be measured by various financial metrics. One of the primary measurements is the accounts receivable turnover ratio, which shows how efficiently a company is collecting money owed to it. This ratio is calculated by dividing total net credit sales by the average accounts receivable during the period being analyzed. A higher turnover ratio indicates that the company is collecting its receivable more frequently throughout the year.
Another important measure is the days sales outstanding (DSO). This calculation shows the average number of days that it takes for a company to collect payment after a sale has been made. A lower DSO number means that the company is able to collect payments more quickly.
These are just a couple of ways to gauge the success of a company's collection efforts. By consistently monitoring these ratios, a business can take the necessary actions to improve its collections processes and maintain a healthy cash flow.