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Receivable turnover ratio definition

Description

Receivable turnover is a ratio that shows how effectively the company collects its’ funds from its’ customers for sold on credit goods or services. This ratio indicates how many times, account receivables (mostly customer’s debts) are collected. As a rule this ratio is calculated for a period of one year, but other periods are also possible. Data to calculate this ratio is collected from balance sheet and income statement.

Receivable turnover ratio is interesting for company’s owners as it indicates the ability of company’s managers to collect customers’ debts. Instead of this ratio it is popular to use another very similar ratio, called days sales outstanding (linkas), when the value of ratio is expressed in days.

Norms and limitations

Low value of this ratio shows that company’s debts are collected slowly. Higher value indicates more effective credit policy.

However in general there is no norm for the receivables turnover ratio, as it depends on the industry. A very high value of receivable turnover ratio shows that the company mainly works on cash on delivery.

Formula

Net sales (revenues, sales) can be described as sales deducting returns and discount for customers.

Accounts receivable can be briefly described as company’s made sales but not collected money. It can be easily be found on balance sheet.