Debtor’s turnover ratio is a system that allows establishes the degree of success of a company in providing and obtaining credit funds. The receivable turnover ratio formula enables to see and evaluate the benefits of using the company assets. A high or low ratio is direct evidence of the effectiveness of the company in the field of lending. Economists widely use this equation in business calculations.
Explanation:
The receivable turnover ratio calculator works on the principle of dividing net credit sales by average receivables for a specified period. The essence of using precisely these variables is that only net credit sales create accounts receivable.
The specialist can find these statistics in the income statement of the company; however, it is worth mentioning that most of them combine net credit and cash sales. Economists compile these calculations taking a month, quarter, or year per unit of time. This equation also expresses the cash flow received from accounts receivable in a specific amount of time.
A high ratio is essential for companies, because the sooner and the more the cash flow is, the more resources the companies will have to pay various taxes. This formula also shows the quality of the credit system of the company and the degree of its attractiveness to customers. A high and low ratio expresses the level of affluence of the company’s customers.
It is worth mentioning that this indicator plays a significant role in terms of efficiency and status for investors who are going to invest in certain companies. Also, analysis of current accounts receivables allows the specialist to develop a future strategy for the company, taking into account previous mistakes.