Receivables Turnover Ratio Calculator

The accounts receivable turnover, also known as debtor's turnover, is one of the easiest ways to quantify a company's efficiency in collecting its debts and outstanding balances from its clients.

If you want a quick method to measure it, Calcopolis has covered you with an accounts receivable turnover calculator and a brief explanation of the formula and how it can help you. Let's dive right in!

What is Accounts Receivable Turnover?

Accounts receivable turnover is a calculable accounting metric used to measure a company's efficiency when it comes to extending credit and collecting its receivables.

This may sound a bit confusing, but once we take away the fancy terms, it's actually a very easy and helpful metric to keep track of!

Simply, while many businesses operate on immediate payments, others may extend the payments through credit.

In that case, the sale is completed, but the cash flow is pushed or extended. However, you still need cash flow to restock, pay salaries, etc., which is why collecting these receivables is critical for maintaining a healthy business.

To make sure that this model operates efficiently, you need to measure how fast you collect these extended credits, and that's where Calcopolis Accounts Receivable Turnover comes in handy!

How to Calculate Accounts Receivable Turnover?

Calculating Accounts Receivable Turnover is in the form of a ratio. Here's how it works:

The Accounts Receivable Turnover Formula

Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivables.

Where:

• Net Credit Sales: Revenue from credit or sales to be paid at a later date
• Average Accounts Receivables: The average amount of receivables (to be paid later) extending over a period of time. 

Average Accounts Receivables can also be represented by the formula: 

(Net Receivables at the Beginning of a Period + Net Receivables at the End of a Period) / 2

Example

Here's a simple explanation of all the previous jargon, which you can apply to your business:

Let's say that we have a sports equipment store that sells treadmills on credit. At the end of a fiscal year, the store's net credit sales for that period were $80,000, whereas the starting and ending receivables for the same period were $6,000 and $8,000, respectively.

In that case, to calculate the accounts receivable turnover ratio, you should do the following:

$80,000 / ($6,000 + $8,000) /2 = $80,000 / $7000 = 11.42

The Importance of This Metric

Now that you have a better understanding of the metric, you might be wondering how it can benefit you. Here's a quick look at the advantages of accounts receivable turnover:

Identifies the Company's Debt Collecting Efficiency

A company with a high accounts receivable turnover collects its debts faster and, therefore, can control and move a larger capital, which helps in growing the business.

Helps in Forecasting Liquidity and Cash Flow

Keeping track of the accounts receivable turnover gives you a better look at your current liquidity status. 

Using this metric, you can understand your cash flow patterns and predict current and future issues. 
If you want to dive deep into liquidity analysis, check out our quick ratio calculator and current ratio calculator.

Allows You to Quickly Assess Your Crediting Policy

If your account receivable turnover is pretty high, it's usually a sign that your clients are creditworthy and that your policies are effective.

On the other hand, a low account receivable turnover means that your clients are not able to pay on time or that your policies are slowing down the cash flow.

What is a Good Receivable Turnover Ratio?

Ideally, the higher the receivable turnover ratio, the better, as it indicates the company efficiently manage its receivables and, therefore, has better liquidity and capital to grow the business.

However, the exact ratio varies from one industry to another. For instance, a ratio of 2.5 is considered acceptable in sectors like retail and service, while 1 to 1.5 can be pretty high in utility sectors.

For that reason, the best way to measure whether your receivable turnover ratio is decent is by comparing it to your industry average and direct competitors.

How to Improve Your Accounts Receivable Turnover Ratio

Lastly, here are some tips that can help you improve your receivable turnover ratio:

• Create a clear payment policy and stick to it
• Calculate your receivable turnover ratio regularly and keep track of your trends
• Invoice regularly and accurately
• Build stronger relationships with your clients
• Use follow-up reminders

Limitations of this metric

When analyzing the Receivables Turnover Ratio, you should be aware of its limitations. One of the main drawbacks is that it only provides a snapshot of a company's performance over a specific period of time. It doesn't take into account any changes in the company's credit policy or the economy that may have occurred since the end of that period.

Another limitation of this ratio is that it only considers a company's credit sales, which may not accurately reflect its total revenue. If a company primarily sells products or services for cash, its receivables turnover ratio may not provide a complete picture of its financial health.

Additionally, the receivables turnover ratio doesn't take into account the quality of a company's receivables. A company may have a high turnover ratio, but if its customers are consistently late in paying or default on their payments, the company may still face cash flow issues and other financial problems.

Finally, the receivables turnover ratio doesn't provide any information on a company's ability to collect its receivables. A high turnover ratio may be meaningless if a company struggles to collect its outstanding balances, which could lead to bad debt write-offs and other financial difficulties.

Summary

While the receivables turnover ratio can be a useful tool for analyzing a company's financial performance, it's important to recognize its limitations and use it in conjunction with other financial metrics and analyses.

See also our Total Asset Turnover Calculator.

Authors

Created by Lucas Krysiak on 2022-10-24 17:44:56 | Last review by Mike Kozminsky on 2023-02-13 17:00:18