What It Measures
Why It Is Important
A high turnover figure is desirable because it indicates that a company collects revenues effectively, and that its customers pay bills promptly. A high figure also suggests that a company’s credit and collection policies are sound.
In addition, the measurement is a reasonably good indicator of cash flow, and of overall operating efficiency.
How It Works in Practice
Receivables turnover = Sales ÷ Receivables
If, for example, a company’s sales are $4.5 million and its average receivables are $375,000, its receivables turnover is:
4,500,000 ÷ 375,000 = 12
Tricks of the Trade
It is important to use the average amount of receivables over the period considered. Otherwise, receivables could be misleading for a company whose products are seasonal or are sold at irregular intervals.
The measurement is also helpful to a company that is designing or revising credit terms.
Accounts receivable turnover is among the measures that comprise asset utilization ratios, also called activity ratios.