What is receivable turnover ratio?

Receivable Turnover Ratio or Debtor's Turnover Ratio is an accounting measure used to measure how effective a company is in extending credit as well as collecting debts. The receivables turnover ratio is an activity ratio, measuring how efficiently a firm uses its assets.

What does a high turnover ratio mean?

The turnover ratio can indicate several things for your company's accounts receivables. For instance, a turnover ratio that's higher indicates the company's efficiency in collecting and converting sales revenue. High turnover ratios can also show how well a company evaluates customers when extending credit.

What is Ar turnover ratio & how is it calculated?

It measures how efficiently and quickly a company converts its account receivables into cash within a given accounting period. The AR Turnover Ratio is calculated by dividing net sales by average account receivables. Net sales is calculated as sales on credit - sales returns - sales allowances.

Why is a low or declining Accounts Receivable Turnover Ratio bad?

Due to the time value of money principle, the longer a company takes to collect on its credit sales, the more money a company effectively loses, or the less valuable are the company’s sales. Therefore, a low or declining accounts receivable turnover ratio is considered detrimental to a company.