What is Account Receivables Turnover ratio? Account receivables ratio is nothing but a number which indicates the number of times a company collects its accounts receivables. A high Accounts Receivables ratio indicates that the company has a very tight credit policy. The company collects its money really fast. A low turnover ratio indicates that the company exercises a very loose credit policy and collects money. A low Account Receivables Turnover ratio can easily caused by a bad credit for a large amount.
Accounts Receivables Turnover Ratio can be expressed in number of times the money is collected collected in a given period or as the Average Collection period. The number of times it is collected can be calculated simply by diving net credit sales by average accounts receivables. The period can be calculated by dividing the accounts receivables by Net credit sales and divide the result by 365 days.
Account receivable turnover and the Average collection period are inversely related. The higher the account receivables turnover ratio the smaller the collection days will be. There aren’t any guidelines on which number indicates a company good credit policy. A high number doesn’t necessarily mean that the company is collecting as per with the industry.
Note that average receivable turnover or average collection period is only the average number and can be misleading. To better understand a company’s standing we need to take the trend of over several periods.
Below is an example of Accounts Receivable Turnover ratio and period. However, use the Average Collection period calculator above to calculate turnover or the period automatically.
A company has Net credit Sales of $300,000 for year 2007. It has beginning accounts receivables of $20,000 and end of year receivables of $40,000. Find the accounts receivable turnover and average collection period.
Step 1: Find the average accounts receivables.
($20,000 + $40,000)/ 2 = $30, 000
Step 2: Find the Average Receivable Turnover.
$300,000/$30,000 = 10 Times.
So the company collects its money 10 times a year.
Step 3: Find the Average Collection Period
($30,000 * 365) / 300,000 = 36.5 Days
Average Collection Period – Calculate average collection period automatically.
Inventory Turnover - Calculate inventory turnover for a company
ROE – Calculate Return on assets or ROE
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