|Receivables Turnover Ratio||Interpretation|
|4 - 5.99||Average|
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The accounts receivable turnover ratio measures the number of times a company's accounts receivable balance is collected in a given period.
Here are steps to calculate Receivables Turnover Ratio.
Here is formula to calculate Receivables Turnover Ratio.
Receivables Turnover Ratio = Net Credit Sales / Average Accounts Receivables
Where Net Credit Sales are the total credit sales made during the period, and Average Accounts Receivable is the average balance of accounts receivable during the same period.
For Calculating Average Accounts Receivables
Average Accounts Receivables = (Accounts Opening + Accounts Closing) / 2
To calculate the receivables turnover ratio, you need to know the net credit sales and the average accounts receivable balance for a specific period, typically a year.
Here's an example of how to calculate the receivables turnover ratio:
Assume that a company had net credit sales of $500,000 and an average accounts receivable balance of $100,000 for the year.
- Receivables Turnover Ratio = Net Credit Sales / Average Accounts Receivable
- Receivables Turnover Ratio = $500,000 / $100,000
- Receivables Turnover Ratio = 5
It's important to note that the ideal receivables turnover ratio can vary by industry and company. It's also important to analyze the trend of the ratio over time and compare it to other companies in the same industry to get a better understanding of how well the company is managing its accounts receivable.
Here is a good receivables turnover ratio but it can vary on industry or some other specification wise.
|Interpretation||Receivables Turnover Ratio|
|Average||4 to 6|
|Good||6 or higher|
Here is basic difference between High Receivables Turnover Ratio vs Low Receivables Turnover Ratio.
|High Receivables Turnover Ratio||Low Receivables Turnover Ratio|
|The company is collecting its outstanding debts relatively quickly, which is generally seen as a positive sign.||The company is struggling to collect its outstanding debts, which could be a sign of underlying financial problems.|
|This indicates that the company has an effective credit and collections process, and is managing its accounts receivable efficiently.||This may indicate that the company has an ineffective credit and collections process, or that it is extending credit to customers who are unlikely to pay on time.|
|A high receivables turnover ratio can help to improve cash flow, reduce the risk of bad debts, and improve profitability.||A low receivables turnover ratio can lead to cash flow problems and may indicate a need for additional financing or a change in credit policies.|
|A high ratio can also help to increase the confidence of lenders, investors, and other stakeholders in the company's financial stability and prospects for growth.||A low ratio can make it difficult for the company to obtain financing, and may lead to a decrease in the company's credit rating.|
There are several benefits of using a receivables turnover ratio calculator, including:
Overall, a receivables turnover ratio calculator can be a valuable tool for businesses looking to improve their financial management and decision-making processes. Check More Finance Related Calculator on Drlogy Calculator to get exact business and financial solutions for growth.
The formula for the receivables turnover ratio is:
Receivables Turnover Ratio = Net Credit Sales / Average Accounts Receivable
An example of the AR turnover ratio calculation: Let's say a company has $1,000,000 in net credit sales during the year and an average accounts receivable balance of $200,000. The receivables turnover ratio would be:
Receivables Turnover Ratio = $1,000,000 / $200,000 = 5
A good receivables turnover ratio varies by industry and company, but a higher ratio is generally better as it indicates that the company is collecting its outstanding receivables quickly. A ratio of 5 or higher is considered good, but again, it depends on the industry and company.
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