This legal claim that the customers will pay for the product, is called accounts receivables, and related factor describing its efficiency is called the receivables turnover ratio. To keep track of the cash flow (movement of money), this has to be recorded in the accounting books (bookkeeping is an integral part of healthy business activity). Net credit sales is the revenue generated when a firm sells its goods or services on credit on a given day - the product is sold, but the money will be paid later. Also, a high ratio can suggest that the company follows a conservative credit policy such as net-20-days or even a net-10-days policy. Simple enough, right? As long as you get paid or pay in cash, sure, the act of buying or selling is immediately followed by payment.īut what happens when you pay using a credit card? You still get your product, but the payment is deferred - meaning it is put off to a later time.Īccounting works on a similar mechanism. Want to order that delicious pizza slice? Well, you have to buy it, i.e., pay for it, there and then. Normally whenever you sell something, you get paid immediately. collected its accounts receivable 5.56 times during the year.If you want to quickly understand what is the accounts receivables turnover ratio formula, but don't want to get overwhelmed by a brainful of accountings terms, let's go back a little bit and start from the beginning. Therefore, the receivables turnover ratio for X Inc. Receivables Turnover Ratio: Now we can calculate the receivables turnover ratio using the formula: Receivables Turnover Ratio = Net Credit Sales / Average Accounts Receivable Receivables Turnover Ratio = $500,000 / $90,000 ≈ 5.56 had accounts receivable of $100,000, and at the end of 2022, it had accounts receivable of $80,000.Īverage Accounts Receivable: To calculate the average accounts receivable, we add the beginning and ending accounts receivable and divide by 2: Average Accounts Receivable = ($100,000 + $80,000) / 2 = $90,000 had net credit sales of $500,000 during 2022.Īccounts Receivable: At the beginning of 2022, X Inc. Once it’s been calculated, this ratio shows how efficiently a firm manages the credit it has issued to its customers and collects on that credit. To calculate the receivables turnover ratio, accountants divide the net value of credit sales during a set period by the average accounts receivable during the same period. It’s usually worked out on an annual basis, but this can also be broken down to produce a monthly or quarterly figure. What you need to know about receivables turnover ratio Once you have these two values, you can divide net credit sales by the average accounts receivable to obtain the receivables turnover ratio. Net Credit Sales: This refers to the total amount of sales made on credit during a specific period, minus any returns, allowances, or discounts.Īverage Accounts Receivable: This is calculated by adding the beginning and ending accounts receivable balances for a given period and dividing the sum by 2. To calculate the receivables turnover ratio, you need to determine the net credit sales and the average accounts receivable. Receivables Turnover Ratio = Net Credit Sales / Average Accounts Receivable The formula for calculating the receivables turnover ratio: It’s widely used in business to measure how efficiently a company is using its assets. You might have heard of it being called the debtor’s turnover ratio. Where have you heard of receivables turnover ratio? Conversely, a low receivables turnover ratio suggests that a company takes longer to collect payments, which can be a potential indicator of credit collection issues or ineffective credit policies.A high receivables turnover ratio indicates that a company collects its receivables quickly, which is generally a positive sign of effective credit management.The receivables turnover ratio is calculated by dividing net credit sales by the average accounts receivable during a specific period.The receivables turnover ratio is a financial metric used to assess how efficiently a company manages its accounts receivable.
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