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.

Formula:

$\mathrm {Receivable\ turnover\ ratio} ={\mathrm {Net\ receivable\ sales} \over \mathrm {Average\ net\ receivables} }$

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
• Average collection period = Days × AR/Credit sales
• Average debtor collection period = Trade receivables/Credit sales × 365 = Average collection period in days,
• Average creditor payment period = Trade payables/Credit purchases × 365 = Average Payment period in days,

See also

• Debtor collection period
• Cash flow
• Working capital