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:
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
edit- 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
editReferences
edit- ^ "Receivable turnover ratio".
- ^ 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.
- ^ "What is the days' sales in accounts receivable ratio? | AccountingCoach". AccountingCoach.com. Retrieved 2016-02-03.
- ^ root. "Average Collection Period Definition | Investopedia". Investopedia. Retrieved 2016-02-03.
- ^ Edexcel Accounting general certificate of education revision guide 2012
- ^ Edexcel Accounting general certificate of education revision guide 2012
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