Receivable turnover ratio or debtor's turnover ratio is an
accounting
Accounting, also known as accountancy, is the process of recording and processing information about economic entity, economic entities, such as businesses and corporations. Accounting measures the results of an organization's economic activit ...
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
asset
In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that can b ...
s.
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
Accounts receivable, abbreviated as AR or A/R, are legally enforceable claims for payment held by a business for goods supplied or services rendered that customers have ordered but not paid for. The accounts receivable process involves customer on ...
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 =
* Average debtor collection period = × 365 = Average collection period in days,
* Average creditor payment period = × 365 = Average Payment period in days,
[Edexcel Accounting general certificate of education revision guide 2012]
See also
*
Debtor collection period
In accounting the term debtor collection period indicates the average time taken to collect trade debts. In other words, a reducing period of time is an indicator of increasing efficiency. It enables the enterprise to compare the real collection pe ...
*
Cash flow
Cash flow, in general, refers to payments made into or out of a business, project, or financial product. It can also refer more specifically to a real or virtual movement of money.
*Cash flow, in its narrow sense, is a payment (in a currency), es ...
*
Working capital
Working capital (WC) is a financial metric which represents operating liquidity available to a business, organisation, or other entity, including governmental entities. Along with fixed assets such as plant and equipment, working capital is consi ...
References
Financial ratios
Working capital management
Accounts receivable
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