Receivable Turnover Ratio
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.
Receivable turnover ratio industry benchmark
Average values for the ratio you can find in our industry benchmarking reference book – Receivable turnover ratio.
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can I use general sales instead?
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?
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.
what if the company income statement didn't tell credit sales?
can I use general sales instead?
Account receivable at the end of period = 48 days x Sales/365 days
Is this correct?
wouldn't this be a disadvantage?