The accounts receivable turnover ratio calculator is a simple tool for calculating the accounts receivable turnover ratio. The turnover ratio is a metric that measures a company’s capacity to provide credit as well as collect debt.
This article will define receivables turnover ratio and show you how to calculate it with the accounts receivable turnover ratio formula. You’ll also learn what a high or low turnover ratio signifies and the consequences of each.
What is the receivables turnover ratio?
If you want to quickly understand what the accounts receivables turnover ratio formula is but don’t want to be overwhelmed by a brain of accounting words, let’s go back a little bit and start at the beginning.
When you sell something, you are usually paid immediately. Do you want that delicious pizza slice? You’ll have to buy it right away, which means you’ll have to pay for it. Isn’t it straightforward? Sure, as long as you get paid or pay in cash, the act of buying or selling is immediately followed by payment.
But what happens if you pay with a credit card? You still get your items, but the payment is deferred or postponed.
Accounting follows the same process. Net credit sales are the revenues generated when a company sells its goods or services on credit on a given day – the product is sold, but the money will be paid later.
To keep track of the cash flow (money movement), it must be recorded in the accounting records (bookkeeping is an integral part of healthy business activity). Accounts receivable is the legal claim that customers will pay for the product, and receivables turnover ratio is a related metric that reflects its efficiency.
Receivables Turnover Ratio Definition
The accounts receivable turnover ratio is also known as the receivables turnover ratio or simply the turnover ratio. But what is the receivables turnover ratio? It is an activity ratio that assesses a company’s efficiency in extending credit to its customers (as measured by net credit sales) and recovering money owed to the company (measured in average accounts receivables).
The receivables daily turnover ratio is computed.
A high turnover ratio is advantageous to a firm since it suggests that the interval between credit sales and payment is reasonable. The company receives prompt payment of outstanding debts, retains liquidity, and can continue to operate – that is, make new credit sales.
The higher the turnover ratio, the sooner the company is paid. A low turnover ratio, on the other hand, is discouraged because it implies a long time between credit sales and payment. It puts the company in jeopardy of ceasing operations due to a shortage of funds.
What is the account receivable turnover ratio formula?
After learning what the receivables turnover ratio is, you’re probably wondering how to calculate the accounts receivables turnover ratio. Don’t worry; the answer to “what is the accounts receivable turnover ratio formula?” isn’t as difficult as it appears. It is made up of the following parts:
Net credit sales / average accounts receivables = receivables turnover ratio
where:
The receivables turnover ratio assesses how well a business lends credit to its customers and how soon it receives payment on any given day.
Net credit sales are revenue from goods or services sold on credit on a specific day and to be paid at a later date.
Average accounts receivable – the claim to money owing to the company from previous credit sales that it has yet to receive from customers. This variable can be further broken down and calculated:
Average receivables = (accounts opened + accounts closed) / 2.
where:
The amount of outstanding receivables at the beginning of the day is known as the accounts opening or accounts receivables (opening).
Accounts closure or accounts receivables refers to the amount of outstanding receivables at the conclusion of the day (close).
Now that you know the key to the accounts receivable turnover ratio formula calculator, the following section will provide an example to teach you how to calculate the receivables turnover ratio.
What formula is used to calculate the accounts receivable turnover ratio?
Assume you are the CEO of “Calculator Enterprises Incorporated,” and you want to calculate your turnover ratio. Your net credit sales amount to $15,000, which includes a $2000 account setup fee and a $3000 account closing cost. To calculate your turnover ratio, first determine your average accounts receivable. To accomplish this, multiply the initial and closing account amounts by two:
Accounts receivable on average = ($2000 + $3000) / 2 = $2500.
Then divide the following credit sale by your outcome:
Receivables turnover ratio = $15,000/$2,500 = 6.
In this case, your turnover ratio is equal to 6.
These calculations are straightforward. However, if you’re completing them on a regular basis, we recommend using our receivables turnover ratio calculator to save time and brainpower.
You now understand how to calculate the accounts receivable turnover ratio.
