The ratio is mainly based on an average, which can easily be skewed by accounts that pay too slowly or quickly. It is more so for bad customer accounts that are past due. It cannot help a company identify accounts that need extra review. It could be due to company errors, such as a product that needs to be replaced because of malfunctioning or shipping errors. Similarly, a low ratio can be a result lack of satisfaction on the customer’s side. If the customer to pay is struggling with their debts, they may not be the right customers. The company may be very lenient with extending credit. A low accounts receivable ratio could also mean the business collection policies are not sufficient. The company deals with creditworthy customers, meaning no bad debts to be written off. The clients are paying off debts on time, creating room for future credit purchases. A business receives payment for debts, increasing the business cash flow used to pay its debts, such as payroll promptly. A high receivable ratio means the company’s collection process is effective.
The average accounts receivable turnover in days would be 365 / 4 or 89 days. The company with a turnover receivable of 4 is likely to get all its debts paid, hence less likely to suffer bad debts. A Company has net credit sales worth $200000 and $50000 worth of average accounts receivables.Receivable Turnover Ratio FormulaĬalculating the accounts receivable is done by taking the net credit sales, which is usually found on the company’s income statement, and dividing it by the average accounts receivables for a given period.Īccounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable Example The receivable turnover ratio or accounts receivable turnover ratio is among of activity ratios used to assess the ability of the business to convert accounts receivable into cash within a financial year.
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