Receivables Turnover Ratio
Understanding the Receivables Turnover Ratio: Measuring Collection Efficiency
The Receivables Turnover Ratio is a financial metric that measures how efficiently a company collects its accounts receivable. It indicates how many times a company converts its receivables into cash within a specific period, reflecting the effectiveness of its credit and collection policies.
Receivables Turnover Ratio = Net Credit Sales / Average Accounts Receivable
Suppose Company DEF has the following financial details:
Net Credit Sales: $1,000,000
Beginning Accounts Receivable: $150,000
Ending Accounts Receivable: $100,000
To calculate the Receivables Turnover Ratio:
Calculate the average accounts receivable: (150,000+100,000)/2=125,000
Divide net credit sales by average accounts receivable: 1,000,000/125,000=8
A Receivables Turnover Ratio of 8 indicates that Company DEF collects its average accounts receivable 8 times a year. This suggests efficient collection processes and effective credit policies.
Efficiency Ratio