Receivables Turnover Ratio

what is receivables turnover

The receivables turnover ratio formula. sometimes referred to as accounts receivable turnover, is sales divided by the average of accounts receivables.

Sales revenue is the amount a company earns in sales or services from its primary operations. Sales revenue can be found on a company's income statement under sales revenue or operating revenue.

Average accounts receivable in the denominator of the formula is the average of a company's accounts receivable from its prior period to the current period. For example, if a company has $200,000 in accounts receivables at the end of one period and had $150,000 of accounts receivables ending in the prior period, the average would be $175,000. Accounts receivables can be found on a company's balance sheet.

Use of the Receivables Turnover Ratio

The receivables turnover ratio is used to calculate how well a company is managing their receivables.

The lower the amount of uncollected monies from its operations, the higher this ratio will be. In contrast, if a company has more of its revenues awaiting receipt, the lower the ratio will be.

Although the formula for the receivables turnover ratio is fairly simple, applying the ratio in a particular situation to determine efficiency can become more complex. A company needs to collect revenues in order to cover expenses and/or reinvest. A lack of collecting sooner is potentially a loss of future earnings from reinvesting. However, customers may look to competitors if the collection is overbearing.

Suppose that the income statement from a company shows operating revenues of $1 million. The same company has accounts receivables of $80,000 this period and $90,000 the prior period. The average accounts receivables is $85,000 which can be divided into the $1 million for a ratio of 11.76.


Category: Bank

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