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Receivables Turnover Ratio

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Example 1:

Calculate the receivables turnover ratio for Green Tea Products USA during the end of its fiscal year, when:

  • Net credit sales = $644,790
  • Accounts receivable (start date) = $43,300
  • Accounts receivable (end date) = $51,730
  • Average accounts receivable = (accounts receivable start period + accounts receivable end period) ÷ 2 = ($43,300 + $51,730) ÷ 2 = $47,515
  • Receivables turnover ratio = net credit sales ÷ average accounts receivable = $644,790 ÷ $47,515 = 13.6

Example 2:

Calculate accounts receivable turnover for The Bling Center of Atlanta, when:

  • Annual total sales = $984,000
  • Returned goods invoiced during the year = $31,400
  • Average annual accounts receivable value = $23,880
  • Net credit sales = total annual sales – value of returned goods = $984,000 − $31,400 = $952,600
  • Receivables turnover = net credit sales ÷ average annual accounts receivable value = $952,600 ÷ $23,880 = 39.9

Receivables Turnover Ratio Definition

Accounts receivable turnover is an activity ratio. It estimates the number of times a business collects its average accounts receivable balance during a time period. It is calculated as the ratio of net credit sales of a business to its average accounts receivable value during a given period, usually a year.

The ratio measures how efficiently a business collects its credit sales. Analysts use this value when they want to measure how long it takes a company to collect its debts.

NOTES:

  • You can find net credit sales values in company income statements.
  • Find the beginning and ending accounts receivable values on company balance sheets for the first and last days of the accounting period.
  • Accounts receivable turnover is usually calculated yearly. However when measuring trend data, it is more meaningful to calculate the value every month or quarter.

Analysis

Generally, a high a accounts receivable turnover rate is favorable because it indicates speedy collections. However, very high values of this ratio may not be favorable, especially if they are achieved by extremely strict credit terms. In this case, tight credit policies can drive away potential customers.

Receivables turnover = net credit sales ÷ average accounts receivable