Receivables turnover ratio

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:

[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. 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[3]
  • Average Collection Period = Days × AR/Credit Sales[4]
  • Average Debtor collection period = Trade Receivables/Credit Sales × 365 = Average collection period in days,[5]
  • Average Creditor payment period = Trade Payables/Credit Purchases × 365 = Average Payment period in days,[6]

See also

References
  1. "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. "What is the days' sales in accounts receivable ratio? | AccountingCoach". AccountingCoach.com. Retrieved 2016-02-03.
  4. root. "Average Collection Period Definition | Investopedia". Investopedia. Retrieved 2016-02-03.
  5. Edexcel Accounting general certificate of education revision guide 2012
  6. Edexcel Accounting general certificate of education revision guide 2012


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