Receivables Turnover Ratio

The receivables turnover ratio, also called the debtor's turnover ratio, is an accounting measure used to measure how effective a company is in extending credit as well as collecting debts. The receivables turnover ratio is an activity ratio, measuring how efficiently a firm uses its assets.

The formula of the receivables turnover ratio is:

$\text{Receivables turnover ratio} = \dfrac{\text{Net receivable sales}}{\text{Average net receivables}}$

A high ratio implies either that a company operates on a cash basis or that its extension of credit and collection of accounts receivable is efficient; in contrast, a low ratio implies the company is not making the timely collection of credit.

Other Uses

Sometimes the receivables turnover ratio is expressed as the "days' sales in receivables":

$\text{Days' sales in receivables} = \dfrac{365}{\text{Receivables turnover ratio}}$

The average collection period can be calculated as follows:

$\text{Average collection period} = \dfrac{\text{Days} \cdot \text{AR}}{\text{Credit sales}}$

The average debtor collection period can be calculated as follows:

$\dfrac{\text{Trade receivables}}{\text{Credit sales} \cdot 365} = \text{Average collection period in days}$

Finally, the average creditor payment period can be calculated as follows:

$\dfrac{\text{Trade payables}}{\text{Credit purchases} \cdot 365} = \text{Average payment period in days}$