Receivables turnover ratio explained

Receivable turnover ratio or debtor's turnover ratio is an accounting measure used to measure how effective a company is in extending credit as well as collecting debts. The receivables turnover ratio is an activity ratio, measuring how efficiently a firm uses its assets.^[1]

Formula:

Receivable turnover ratio = { Net receivable sales \over Average net receivables }^[2]

A high ratio implies either that a company operates on a cash basis or that its extension of credit and collection of accounts receivable is efficient.^[3] While a low ratio implies the company is not making the timely collection of credit.

A good accounts receivable turnover depends on how quickly a business recovers its dues or, in simple terms how high or low the turnover ratio is. For instance, with a 30-day payment policy, if the customers take 46 days to pay back, the Accounts Receivable Turnover is low.

Relation ratios

• Days' sales in receivables = 365 / Receivable turnover ratio^[4]
• Average collection period = ^[5]
• Average debtor collection period = × 365 = Average collection period in days,^[6]
• Average creditor payment period = × 365 = Average Payment period in days,^[7]

See also

• Debtor collection period
• Cash flow
• Working capital

Notes and References

1. Web site: Receivable turnover ratio .
2. Weygandt, J. J., Kieso, D. E., & Kell, W. G. (1996). Accounting Principles (4th ed.). New York, Chichester, Brisbane, Toronto, Singapore: John Wiley & Sons, Inc. p. 801.
3. Web site: Davis . Morgan . 2022-08-19 . Accounts Receivable Turnover Ratio . 2024-08-19 . Esteempeak . en-US.
4. Web site: What is the days' sales in accounts receivable ratio? AccountingCoach. AccountingCoach.com. 2016-02-03.
5. Web site: Average Collection Period Definition Investopedia. Investopedia. 2016-02-03. en-US. root.
6. Edexcel Accounting general certificate of education revision guide 2012
7. Edexcel Accounting general certificate of education revision guide 2012