Receivables Turnover Ratio
What is a Receivables Turnover Ratio?
The receivables turnover ratio is a company's accounts receivable. The formula for receivables turnover ratio is:
Turnover = Net Sales/Average Accounts Receivable
How Does a Receivables Turnover Ratio Work?
For example, let's assume that Company XYZ sells $10,000,000 of widget parts this balance sheet. are assets, and as such, they appear on the balance sheet. In particular, are current assets, meaning the amount owed is expected to be received within the next 12 months.
Using this information and the formula above, we can calculate that Company XYZ's receivables turnover ratio is:
Receivables Turnover Ratio = $8,000,000/$400,000 = 20
By dividing 365 days by the ratio, we find that Company XYZ takes about 18 days to turn over its .
Why Does a Receivables Turnover Ratio Matter?
turnover is a measure of how well a company collects from customers. If it's too low, the company may be lax in collecting what's owed too it and may soon be struggling to find the to pay the bills; if too high, the company may be unwisely harming customer relationships or not competitive payment . In general, levels correspond to changes in levels.
It is important to that different industries have different norms and standards regarding receivables collection, and so determining whether a turnover ratio is high or low should be made within this context. It is also important to that because the formula uses average, it is possible that one or two customers could artificially drive the numbers up or down.