The receivables turnover ratio calculator is a simple tool that helps you calculate the accounts receivable turnover ratio. The turnover ratio is a measure that not only shows a company's efficiency in providing credit, but also its success at collecting debt. This article will explain to you the receivables turnover ratio definition and how to calculate receivables turnover ratio using the accounts receivable turnover ratio formula. Additionally, you will learn what does a high or low turnover ratio mean, and what are the consequences of each.
What is the receivables turnover ratio?
If you want to quickly understand what is the accounts receivables turnover ratio formula, but don't want to get overwhelmed by a brainful of accountings terms, let's go back a little bit and start from the beginning.
Normally whenever you sell something, you get paid immediately. Want to order that delicious pizza slice? Well, you have to buy it, i.e., pay for it, there and then. Simple enough, right? As long as you get paid or pay in cash, sure, the act of buying or selling is immediately followed by payment.
But what happens when you pay using a credit card? You still get your product, but the payment is deferred - meaning it is put off to a later time.
Accounting works on a similar mechanism. Net credit sales is the revenue generated when a firm 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 (movement of money), this has to be recorded in the accounting books (bookkeeping is an integral part of healthy business activity). This legal claim, that the customers will pay for the product, is called accounts receivables, and related factor describing its efficiency is called the receivables turnover ratio.
Receivables turnover ratio definition
The accounts receivables turnover ratio is also known as the receivables turnover ratio, or just the turnover ratio for shortness. But what is the receivable turnover ratio? It is an activity ratio that shows how efficient a company is in providing credit to its customers - measured in net credit sales, and how effective it is in recovering the money that is owed to the company - measured in average accounts receivables. Receivables turnover ratio is measured daily.
A high turnover ratio is healthy for a company, because it means that time between credit sales and receiving the money is not too long. The company gets outstanding debts paid quickly, has liquidity, and can continue operating - that is, making new credit sales. The higher the turnover ratio, the faster the company gets paid. Conversely, a low turnover ratio is not recommended, because it indicates the time between credit sales and getting paid is long. It creates risk not having enough funds to continue operation.
What is the accounts receivable turnover ratio formula?
Now that you know what is the receivables turnover ratio definition, you're probably wondering how to calculate the accounts receivables turnover ratio. Don't worry, answering "what is the accounts receivable turnover ratio formula?" is not as difficult as it might sound. It consists of:
receivables turnover ratio = net credit sales / average accounts receivables,
- receivables turnover ratio shows how effective the company is at extending credit to its customers and how efficiently it gets paid back on a given day.
- net credit sales - revenue from goods or services sold on credit on a given day - to be paid at a later date.
- average accounts receivables - the claim to the money from previous credit sales that the business has yet to receive from customers. This variable can be further broke-down and calculated:
average accounts receivables = (accounts opening + accounts closing) / 2,
- accounts opening or accounts receivables (opening) means the amount of outstanding receivables at the start of the day
- accounts closing or accounts receivables (closing) means the amount of outstanding receivables at the end of the day
Now that you know the secret to the accounts receivable turnover ratio formula calculator, the next section will use an example to show you how to calculate the receivables turnover ratio.
How to calculate the accounts receivables turnover ratio? - the receivables turnover ratio calculator
Let's say you are the owner of "Calculator Enterprises Incorporated," and you want to calculate your turnover ratio. Your net credit sales are $15000, your accounts opening is $2000, and your accounts closing is $3000. To find your turnover ratio, first you need to find the average accounts receivables. To do this, add accounts opening and accounts closing and divide them by two:
average accounts receivables = ($2000 + $3000) / 2 = $2500.
Then you need to divide the next credit sale by your result:
receivables turnover ratio = $15000 / $2500 = 6.
In this case, your turnover ratio is equal to 6. Those calculations are easy to follow. Still, if you are doing them for a large number of days, we suggest sparing your brainpower and doing them quickly with our receivables turnover ratio calculator.
Congratulations, you now know how to calculate the accounts receivable turnover ratio. If similar business topics are of interest to you, check out our current ratio calculator, which is used to measure the liquidity of a company, or discounted cash flow calculator, which is a method of company valuation.