What Does Receivables Turnover Ratio Mean?
An accounting measure used to quantify a firm's effectiveness in extending credit as well as collecting debts. The receivables turnover ratio is an activity ratio, measuring how efficiently a firm uses its assets.
Formula:
Receivables Turnover Ratio = Net Credit Sales / Average Account Receivable(opening + ending /2)
Some companies' reports will only show sales - this can affect the ratio depending on the size of cash sales. Investopedia explains Receivables Turnover Ratio
By maintaining accounts receivable, firms are indirectly extending interest-free loans to their clients. 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.
A low ratio implies the company should re-assess its credit policies in order to ensure the timely collection of imparted credit that is not earning interest for the firm.
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