What is Accounts Receivables Turnover Ratio?
Accounts Receivables Turnover Ratio is an Activity Ratio which is used to measure how efficient the Company is in providing Credit Facility to the Customers as well as recovering the amount due from them well within the due dates thus increasing the Working Capital management of the Company.
In this ratio, we consider the credit sales and the accounts receivables. As you know when a firm sells its goods on credit, it takes a decent time to get paid. The amount that the firm would receive due to credit sales in the near future is called accounts receivables.
This ratio is a measure that calculates the proportion of how much net credit sales a firm has and how much average accounts receivables the firm is dealing with.
Accounts Receivables Turnover Ratio Formula
Let’s have a look at the formula –
In the above ratio, we have two components.
- The first component is the net credit sales. We need to keep in mind that here we can’t take the total net sales. We need to separate the cash sales and credit sales. And then we need to deduct any sales return related to the credit sales from the credit sales.
- The second component is the average accounts receivables. To find out the average accounts receivables (net), we need to consider two elements – Accounts Receivables (Opening) Accounts Receivables (Closing) and find the average of the two.
Here’s a simple example to illustrate this concept
Gigs Inc. has the following information –
- Net Credit Sales – $500,000
- Accounts Receivables (Opening) – $40,000
- Accounts Receivables (Closing) – $60,000
Find out the Accounts Receivables Turnover Ratio.
In the above example, we have all the information available.
First, we will find out the average accounts receivables (net).
- Average Accounts Receivables (net) = ($40,000 + $60,000) / 2 = $50,000.
By using the formula of Accounts receivables turnover, we get –
- Accounts Receivables Turnover = Net Credit Sales / Average Accounts Receivables
- = $500,000 / $50,000 = 10 times.
If we compare the ratio with other companies under a similar industry, we will be able to interpret whether this number is efficient or not.
Let us calculate the accounts receivables turnover ratio of Colgate.
- Here we have used the assumption that all sales are “credit sales”
- For eg. took the average receivables of 2014 and 2015 (as shown in the image below)
- On average Colgate’s accounts receivables turnover has been around 10x.
- Higher Receivables Turnover implies a higher frequency of converting receivables into cash
Below is a quick comparison of Receivables turnover of Colgate vs P&G vs Unilever
- We note that P&G Receivable turnover ratio is slightly higher than Colgate.
- Unilever’s Receivables turnover is closer to that of Colgate.
Use of Accounts Receivables Turnover
- It is an efficiency ratio. It is used to see how many times accounts receivables have been collected during a fiscal year.
- Higher turnover is healthy for a company. It denotes that the time interval between the credit sales and the receipt of money is lower. And that means the firm is quite efficient in collecting the accounts receivables.
- On the other hand, a lower turnover is not good enough for a company. It indicates that the time interval between the credit sales and the receipt of money is higher. And as a result, there’s always a risk of not receiving the due amount.
- When an investor looks at this ratio, she needs to know how efficient the firm is in collecting the due amount. If there’s any risk in delaying or not receiving the payment, it may directly affect the cash flow of the company.
Accounts Receivables Turnover Ratio Calculator
You can use the following Calculator.
|Receivables Turnover Ratio Formula =||
Calculate Accounts Receivables Turnover in Excel
This is very simple. You need to provide the two inputs of Net Credit Sales and Average Accounts Receivables.
You can easily calculate in the template provided.
You can download this template here – Accounts Receivables Turnover Ratio Excel Template
Accounts Receivables Turnover Ratio Video
This has been a guide to Accounts Receivables Turnover Ratio formula, its uses along with practical examples. Here we also provide you with Accounts Receivables Turnover Ratio calculator along with a downloadable excel template. You may also refer to the following to learn more about Financial Ratios.