Receivables Turnover Ratio Calculator is a useful financial tool for calculating accounts receivable turnover. Additionally, it shows you how successfully a company provides credits and collects debts from customers. For example, the higher turnover ratio you score in the calculator would signalize that your company is quickly collecting debt from customers. So, it means that it will have enough funds to continue operating and perform well in business accounting. On the other hand, if you score low turnover ratio, your company inefficiently handles credit sales and fails to have enough funds to continue operating.

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Receivables Turnover Ratio – Definition?

Receivables Turnover Ratio (turnover ratio) is a financial term that measures how efficiently and quickly a company manages to send back or repay the short-term debt, including the recovery of the cash that the company lent. Therefore, the quicker you are in completing payments due, the higher the receivables turnover ratio will be. Generally, people take and compare ratios of two or more firms. And based on that, can judge whether a particular company keeps up with its competitors well or not in business accounting. 

Receivables Turnover Ratio Formula

We saw in brief what accounts receivables turnover ratio is but wait. So how do we approach and calculate it? Firstly, let’s take a look at the formula below:

Formula = \frac {Net \; Credit \; Sales} {Average \; Accounts \; Receivables}

Formula explanation:

  • Receivable turnover ratio – shows how effectively a company provides credit to its customers and how efficiently it recovers the lent money.
  • Net Credit Sales – represents the money (capital) a company gets through, allowing customers to purchase goods on credit. Customers buy something but not in cash. Thus this number shows how much capital your company gets from the purchases completed on credit (not on the same day, but after some period).
  • Average Accounts Receivables – Previous credits that your company has yet to claim.

Average Accounts Receivables Formula

We mentioned in the section above how the calculation of the receivables turnovers works, so we could see that an integral part of the formula takes average accounts receivables (AAR). But, what is it?

Average accounts receivable is another financial term and represents the number we get after adding starting and ending accounts receivables (monthly or quarterly), dividing it by 2. Further, look at the formula below:

\text{AAR formula} =\frac{\text{Accounts opening + Accounts closing}}{2}

Formula explanation:

  • accounts opening – a financial term that represents the number of receivables at the start of the day
  • accounts closing – a financial term that represents the number of receivables at the end of the day

High and Low Receivables Turnovers – What do they tell you?

The turnover ratio tells you how quickly a company gets paid for credit sales (purchased made on credit). Generally, it would be best to aim to have a higher receivable turnover ratio. This is because it indicates a company’s successful management of credit sales in business accounting.

However, let’s compare low and high turnovers and find out the real difference between them:

  • Low receivable turnover ratio – indicates that it takes a long period for a company to get paid after credit sales. This way, you risk having no funds to continue to operate.
  • High receivable turnover ratio – indicates the opposite to the low turnover ratio. It signalizes that a company is healthy and quickly recovers the cash from credit sales. Therefore, the company can continue to operate because it gets the funds back, and there is no risk.

Receivables Turnovers and Asset Turnovers – Difference?

The asset turnover value also relates to the company’s sales. However, compared to the receivables turnovers ratios, the asset turnover ratio tells you its sales value relative to its assets’ value. It indicates how well a company uses its assets to generate revenue. Similarly with the receivables turnovers ratios, if the asset turnover ratio is higher, the company is performing well; otherwise, it doesn’t use its assets efficiently.

Receivables Turnover Ratio – Interpretation

In order to fully understand the receivables turnovers ratios and how we calculate them, we need to explain the relationship between the following items, which you can find in our calculator:

  • Net credit sales (the higher this number is, the higher turnover ratio you get)
  • Accounts opening and Accounts closing (these two numbers have to be pretty low to produce a higher turnover ratio)
  • Average account receivables (this number closely depends on accounts opening and closing, and it gets populated automatically by the calculator)

Receivables Turnover Ratio Calculator – How to Use?

In the previous section, we mentioned and explained the items on which the turnover ratio depends. Furthermore, let’s use our Receivables Turnover Ratio Calculator and show you how to calculate the ratio instantly without using any formula.

Steps:

  • Determine the amount of revenue a company generated on a given day (net credit sales) – E.g., $50,000
  • To find the average accounts receivables, enter the amount of accounts opening ($3000) and closing receivables ($4000).
  • The calculator will show you the average ratio value – $3500.
  • Knowing the average ratio, our calculator instantly uses the formula and calculates the receivables turnovers ratios, which is – 14.286 for the given day.

Receivables Turnover Ratio Calculator – Example

Okay, it’s the perfect time for a practical example. Hence, we will use our Receivables Turnover Ratio Calculator for calculating the turnover ratio in this example.

Scenario: Imagine you are the CEO of a firm, and you want to track and monitor accounts receivables turnovers for a certain period. How can you accomplish that? 

  • Well, the first step you need to take is to determine the total amount of net credit sales (the cash you get from selling services or goods on credit for a particular day).

Suppose you earned $30,000 net credit sales.

  • The second step is to find average accounts receivables by combining opening ($2500), and closing ($4000) accounts receivables.

Average accounts receivables = $3250.

  • Further, once the average account receivables ratio is known, our calculator will instantly calculate the turnover ratio.

Receivables turnover ratio = 9.23.

Receivables Turnover Ratio – Real-world Application

What are the real examples of receivables turnovers ratios? Why would you even know how to calculate it? Let’s consider some of the very common uses of it and what benefits it brings to your business accounting:

  • It enhances your cash inflows.
  • The turnover ratio helps you reduce write-offs and bad debts to avoid huge losses.
  • It indicates whether you should modify your existing credit policies.
  • The turnover ratio reduces the time needed to recover outstanding debts.

FAQ

What is the accounts receivable (AR) turnover ratio?

Accounts receivable turnover ratio is the number that tells us how efficiently and quickly a company provides sales on credit and gets back the money from the customers.

How to calculate the receivables turnover ratio?

\text{Formula = Net Credit Sales} \div \text{Average Accounts Receivables}
We calculate the receivables turnover ratio by dividing the net sales and the average accounts receivables ratio (opening and closing accounts).

What can the accounts receivable ratio tell you?

Besides giving you insight into a company’s performance of managing credits sales and payments due, the account receivable ratio can also tell you:
– The state of your cash inflows.
– Whether you should reduce write-offs and bad debts to avoid huge losses.
– Whether you should modify your existing credit policies.

What industries have high accounts receivable?

Each industry or sector has a different turnover ratio. Therefore, we will see which industries have the highest turnover ratio in the list below:

Energy – 96.50
Services – 36.34
Healthcare – 21.62
Retail – 15.29
Financial – 14.80
Technology – 10.80
Consumer Discretionary – 10.74
Transportation – 7.55

Is it better to have a high or low accounts receivable turnover?

It’s better to have a higher accounts receivable turnover ratio because it indicates that the company is managing sales on credit efficiently and getting paid from the customers in a shorter period of time. In short, if you earn a low ratio score, it would mean that your company is inefficiently handling credit sales.