Receivable Turnover Ratio

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Definition

The receivable turnover ratio (debtors turnover ratio, accounts receivable turnover ratio) indicates the velocity of a company's debt collection, the number of times average receivables are turned over during a year. This ratio determines how quickly a company collects outstanding cash balances from its customers during an accounting period. It is an important indicator of a company's financial and operational performance and can be used to determine if a company is having difficulties collecting sales made on credit.

Receivable turnover ratio indicates how many times, on average, account receivables are collected during a year (sales divided by the average of accounts receivables). A popular variant of the receivables turnover ratio is to convert it into an Average collection period in terms of days. The average collection period (also called Days Sales Outstanding (DSO)) is the number of days, on average, that it takes a company to collect its accounts receivables, i.e. the average number of days required to convert receivables into cash.

An accounting measure used to quantify a firm's effectiveness in extending credit as well as collecting debts.

Calculation (formula)

Receivables turnover ratio = Net receivable sales/ Average accounts receivables

Accounts Receivable outstanding in days:

Average collection period (Days sales outstanding) = 365 / Receivables Turnover Ratio

Norms and Limits

There is no general norm for the receivables turnover ratio, it strongly depends on the industry and other factors. The higher the value of receivable turnover the more efficient is the management of debtors or more liquid the debtors are, the better the company is in terms of collecting their accounts receivables. Similarly, low debtors turnover ratio implies inefficient management of debtors or less liquid debtors. But in some cases too high ratio can indicate that the company's credit lending policies are too stringent, preventing prime borrowing candidates from becoming customers.

Exact formula in the ReadyRatios analytic software

Average collection period = ((F1[b][TradeAndOtherCurrentReceivables] + F1[e][TradeAndOtherCurrentReceivables])/2)/(F2[Revenue]/NUM_DAYS)

Receivables turnover ratio = 365 / Average collection period

F2 – Statement of comprehensive income (IFRS).
F1[b], F1[e] - Statement of financial position (at the [b]eginning and at the [e]nd of the analizing period).
NUM_DAYS – Number of days in the the analizing period.

365 – Days in year.
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Quote Reah Paeaz, 18 July, 2012
what if the company income statement didn't tell credit sales?
can I use general sales instead?
Quote Vit. A., 18 July, 2012
As you can see in the formula above instead of credit sales you can use simplified way of calculation (receivables from balance sheet and revenue from income statement).
Quote Guest, 18 February, 2013
Looking at the formula at the end of the article, it seems to me a little bit of inconsistency is present. With the average collection period formula if we are calculating the the periods shorter than 12months, like for example 9 monts we would use istead of 365 days 270 days in order to have average collection period for these 9 monhts. Yet, in the second formula the same logic does not aply since we are dividng 365 days of the full year with average collection period (regardless of the respective period) in order to calculate receivable turnover ratio. My question is, why aren't we using the NUM DAYS instead of 365 days in the second formula?
Quote Vit. A., 19 February, 2013
Quote
Guest wrote:
Looking at the formula at the end of the article, it seems to me a little bit of inconsistency is present. With the average collection period formula if we are calculating the the periods shorter than 12months, like for example 9 monts we would use istead of 365 days 270 days in order to have average collection period for these 9 monhts. Yet, in the second formula the same logic does not aply since we are dividng 365 days of the full year with average collection period (regardless of the respective period) in order to calculate receivable turnover ratio. My question is, why aren't we using the NUM DAYS instead of 365 days in the second formula?
You should use NUM DAYS = 365 for annual calculation only. If you take Revenue for 1 month, use NUM DAYS = 30 (31).

Receivables turnover ratio is always annual indicator so there is 365 days used in it formula. Of caouse, you can calculate your costum indicator like You should use NUM DAYS = 365 for annual calculation only. If you take Revenue for 1 month, use NUM DAYS = 30 (31).

Receivables turnover ratio is always annual indicator (it shows number turns during the year) so there is 365 days used in it formula.
Quote Guest, 29 October, 2013
Quote
Reah Paeaz wrote:
what if the company income statement didn't tell credit sales?
can I use general sales instead?
We will use revenue from operations.
Quote Guest, 18 November, 2013
How to calculate the receivables account if the business of the company expect to be paid by credit cards about 48 days of account receivables?

Account receivable at the end of period = 48 days x Sales/365 days

Is this correct?
Quote Guest, 26 December, 2013
What is the company doesn't has neither sales or revenue what to do?! :( I'm in deep trouble I really need help ASAP
Quote Guest, 25 January, 2014
Well you may need study accounting
Quote Guest, 11 February, 2014
Hi, in regards to the debtors days, it says it is better if the figure is higher, but if the figure is higher it will take you longer to recover your debts.
wouldn't this be a disadvantage?
Quote Guest, 22 February, 2014
What if the AR turnover not change anymore, no addition in sales and no payment for more than 1 year, let say 24 month the customer didn't pay. How to calculate AR days? Can we use formula no of days for 2 years. Example AR TO : 0,95 . Can we find AR days usinge this formula = (365+365)/0,95 = 768 days. Secondly: Do the AR days have maximum days. If you say AR days only for annual indicator, what about the payment AR more than 1 year.
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