What Is a Receivables Turnover Ratio?

Accounts receivable is another important item of a company's current assets in addition to its inventory. Accounts receivable turnover rate is the ratio of net sales of credit sales to the average balance of accounts receivable within a certain period of time. It is an indicator to measure the turnover speed and management efficiency of corporate receivables. ^[1]

Accounts receivable turnover

Accounts receivable turnover rate is the average number of times accounts receivable are turned into cash during the specified analysis period. The calculation formula is divided into theory and application. The only difference between the two is whether the sales income includes the current sales income. Can be understood as sales

Accounts receivable turnover rate should be considered in combination with the operation mode of the enterprise. The following situations can not reflect the actual situation using this indicator: First, seasonally operating enterprises; Second, a large number of installment settlement methods; Third, a large amount of cash-settled sales; Fourth, a large number of sales at the end of the year or at the end of the year Sales have fallen sharply.

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Accounts receivable turnover rate is within a certain period of time

In general, the higher the receivables turnover rate, the better, indicating that the company's collection speed is fast, the average collection period is short, the bad debt loss is small, the assets flow quickly, and the debt repayment ability is strong. Correspondingly, the shorter the days of accounts receivable turnover, the better. If the number of days for the company to actually recover the account exceeds the number of days for the account receivable specified by the company, it means that the debtor has a long default and low credibility, which increases the risk of bad debt losses; it also shows that the company's ineffective collection of accounts and the assets The formation of bad debts and even bad debts has caused the current assets to not flow, which is very detrimental to the company's normal production and operation. On the other hand, if the company's accounts receivable turnover days are too short, it means that the company follows a tight credit policy and the payment terms are too harsh, which will limit the expansion of corporate sales, especially when such restrictions When the cost (opportunity benefit) is greater than the cost of credit sales, it will affect the profitability of the company.

There are several factors that affect the accuracy of the accounts receivable turnover rate and turnover days calculation. First, due to the seasonal reasons of the company's production and operation, the accounts receivable turnover rate cannot accurately reflect the actual situation of the company's sales. Secondly, some listed companies use installment payment methods extensively during product sales. Thirdly, some companies take a lot of cash to sell. Finally, some companies experienced a significant increase in sales at the end of the year or a significant decrease in sales at the end of the year. These factors will have a great impact on the turnover rate or days of turnover. When analyzing these two indicators, investors should compare the company's current indicators with the company's previous indicators, industry averages or other similar company's indicators to determine the level of the indicators.