Receivables turnover ratio

Short description: Measure of how efficiently a firm collects credit sales from customers

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 salesAverage 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. 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

* Debtor collection period
* Cash flow
* Working capital

## References

1. ↑ "Receivable turnover ratio". http://www.investopedia.com/terms/r/receivableturnoverratio.asp.
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". http://www.accountingcoach.com/blog/days-sales-accounts-receivable.
4. ↑ root. "Average Collection Period Definition | Investopedia" (in en-US). http://www.investopedia.com/terms/a/average_collection_period.asp.
5. ↑ Edexcel Accounting general certificate of education revision guide 2012
6. ↑ Edexcel Accounting general certificate of education revision guide 2012

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