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 = $Days &times; AR⁄Credit sales$
 * Average debtor collection period = $Trade receivables⁄Credit sales$ &times; 365 = Average collection period in days,
 * Average creditor payment period = $Trade payables⁄Credit purchases$ &times; 365 = Average Payment period in days,