# Receivable Turnover Ratio

Asset management (turnover) ratios Print Email

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.

## Receivable Turnover Calculation (Formula)

where "Net Sales" is the total sales for a given period and "Average Accounts Receivable" is the average accounts receivable balance for the same period.

Interpretation: A higher ratio indicates that a company is effectively managing its accounts receivable and collecting payments quickly, while a lower ratio may indicate that a company is having trouble collecting payments and may be a warning sign of potential financial problems.

A low receivables turnover ratio could mean that a company is extending long payment terms to its customers, which could be hurting its cash flow. It could also indicate that a company is having trouble collecting its accounts receivable, which could be a sign of financial distress. Additionally, a low ratio could be the result of a company having a large volume of uncollectible accounts, which could impact its profitability and financial stability.

Accounts Receivable outstanding in days:

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

Time frame: The receivables turnover ratio should be evaluated over a period of time to get a complete picture of a company's credit and collection processes. A single ratio for a single period may not provide an accurate picture of the company's financial health.

## Receivables Turnover Ratio Standards 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.

The optimal level of the receivables turnover ratio can vary depending on the industry in which a company operates. For example, companies in the retail industry generally have a higher receivables turnover ratio than companies in the construction or real estate industries, as payments for retail goods are typically collected more quickly than payments for large construction projects.

Limitations: The receivables turnover ratio does not take into account the quality of the accounts receivable, and may be misleading if a company has a high volume of uncollectible accounts. It is important to consider the ratio in conjunction with other financial metrics and information to get a complete picture of a company's financial health.

## Exact formula in the ReadyRatios analytic software

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 analizing period.
365 – Days in year.

## Receivables Turnover Ratio Industry Benchmark

Average values for the ratio can be found in our industry benchmarking reference bookReceivable turnover ratio.

## How to improve company's receivables turnover ratio

There are several steps a company can take to improve its receivables turnover ratio:

1. Streamline credit and collection processes. A company can improve its ratio by streamlining its credit and collection processes to make sure that it is effectively managing its accounts receivable and collecting payments in a timely manner.
2. Offer incentives for early payment. Offering early payment discounts or other incentives to customers can encourage them to pay their invoices more quickly, which will improve the company's ratio.
3. Evaluate credit policies. A company should regularly evaluate its credit policies to make sure that it is granting credit only to customers who are capable of paying. If necessary, the company should tighten its credit policies to reduce the amount of accounts receivable it has to manage.
4. Monitor accounts receivable. A company should regularly monitor its accounts receivable to identify any potential issues and take action to address them. This can include following up with customers who are late on their payments, renegotiating payment terms, or writing off uncollectible accounts.
5. Implement automated systems. Implementing automated systems, such as electronic invoicing and online payment systems, can make the credit and collection process more efficient and reduce the amount of time it takes to collect accounts receivable.
6. Foster positive relationships with customers. Building positive relationships with customers can encourage them to pay their invoices more quickly and reduce the likelihood of payment issues. This can involve providing excellent customer service, timely responses to customer inquiries, and addressing any concerns or problems in a timely manner.

Quote , 18 July, 2012
what if the company income statement didn't tell credit sales?
can I use general sales instead?
Quote , 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 , 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, 30 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, 19 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, 27 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.
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.
Quote Shams, 11 May, 2014
where i find the net receivable sales on the financial statement? also i have seen that CGS sometime uses instead of net receivable why?
Quote Guest, 10 June, 2015
Hi

Do you know the benchmark ratio for legal firm?
Quote Alex, 4 April, 2016
Is it right to deduct disputed invoices from receivables while calculating dso
Quote Guest, 17 August, 2016
Can i just use receivables at end of year divided by sales times 365 days instead of using average receivables
Quote Guest, 17 November, 2016
please explain this formula by one example
Quote Guest, 28 November, 2016
Shall I include the checks under collection and Notes receivable as a part from the Accounts receivable balance?
Quote Guest, 12 October, 2017
what is account receivable turn-days
Quote Guest, 24 April, 2019
I think a recent change in formula taking total receivable into account instead avg receivable. Can anyone tell, if there is any change in IFRS or not??
Quote , 29 March, 2020
It is very useful...