>> November 14, 2011
Meaning Debtor Turnover ratio
Debtor turnover ratio is the relationship between net sales and average debtors. It is also called account receivable turnover ratio because we debtor and bill receivables' total is used for following formula
= Net Credit Sales / Average Debtors ( sundry debtors + bill receivables)
Average Debtors = Opening balance of debtors + closing balance of debtors / 2
Net Credit Sales = Total sales - sales return - cash sales
If net credit sales is $50000 and average debtors are $ 10000, then debtor turnover ratio is 5 times. It means, net sales is 5 times of total debtors. We issue new stock for sale which is 5 times of its debtors. It means, our average debtors 5 times are
converted into cash. We collected cash from our debtors and then we sell the more goods.
Interpretation of Debtor Turnover Ratio
1. Higher debtor turnover ratio is good because more higher debtor turnover ratio means, more fastly, we are collecting money. Suppose, in above example, we have only one debtor Mr. Alfred. We sold $ 50000 goods 5 times. It means, we are collecting money from Alfred 5 times. More times, we collect money from Mr. Alfred, our liquidity position will become more strong.
2. Lower debtor turnover ratio is not good because it tells us that we have not manage debtors better ways. Money from debtors are not collected fastly.
If we calculate average collection period on the basis of debtor turnover ratio, we can analyze our debtors more deeply.