The receivables turnover ratio is one of the financial indicators of business activity. It shows how much accounts receivable are turnover for the analyzed period. For accounts receivable turnover ratio calculation, you need figures from the balance sheet and the income statement (income statement).
Explanation:
Receivables turnover measures the speed at which an organization’s accounts receivable are repaid and how quickly it receives payment for sold goods, works, or services from its customers. The turnover ratio of accounts receivable shows how many times in a particular period, the organization has received payment from its customers in the amount of the average outstanding balance. The indicator measures the effectiveness of the organization’s customer relationship in collecting receivables and also reflects the organization’s credit sales policy.
Regardless of assets, the turnover ratio shows the efficiency of their use. For accounts receivable, the formula for the turnover ratio is defined as a partial division of sales revenue for the period to the average amount of accounts receivable for that period:
The ratio shows how much dollars of revenue is attributable to 1 dollar of accounts receivable and, in fact, characterizes the speed at which reports receivable turn into cash. Therefore, an increase in the turnover ratio of accounts receivable is considered a positive trend. However, productive activity is not necessarily accompanied by high turnover. For example, when selling on credit, the balance of receivables will be high, and their turnover ratio accordingly low.
For the turnover of accounts receivable, as well as for other indicators of turnover, there are no clear standards, because they are highly dependent on industry characteristics and technology of the enterprise. The organization analyzes the turnover ratio in dynamics, as well as in comparison with the indicators of competitors.