Series 79: 3.1.5.2. Receivables Turnover Ratio

3.1.5.2. Receivables Turnover Ratio

Recall from Chapter 1 that a company’s accounts receivable represents extensions of credit to customers. The receivables turnover ratio measures how many times during an accounting period a company collects its accounts receivable. This ratio measures the company’s effectiveness and efficiency in extending credit and collecting debts. A company with a receivables turnover ratio that is low for its industry sector may be having problems with delinquencies. These problems may be the result of ineffective collections efforts or overly liberal credit policies. A company with a relatively high receivables turnover ratio is probably managing its collections process efficiently and can more quickly return receivables to the business as cash to be put back to work.

To calculate the receivables turnover ratio for a given period, first determine the average accounts receivable for the period. As with average inventory, this requires taking the beginning and ending figures for the period from the balance sheet, adding them together, and dividing by two:

Next, find the net credit sales figure, if any, from the income statement for the period. Most companies do not report net credit sales; for these companies, just use t