This receivables turnover ratio calculator checks a company’s efficiency in collecting its sales on credit by measuring the no. of times receivables are collected on average during a fiscal year. There is more information on how to calculate this indicator below the application form.

Annual sales on credit:*
\$
Starting receivables balance:*
\$
Ending receivables balance:*
\$

## How does this receivables turnover ratio calculator work?

This accounting tool helps in evaluating the efficiency in collecting the receivables of a company by considering:

• its yearly sales credit;

• beginning and ending receivables balance, which are the money the company expects to receive from its customers (individuals or juridical entities) for goods and/or services that have been delivered or used.

Receivable turnover ratio is an efficiency indicator for the strategy of collection and is usually related with the average collection period figure, as it computes the number of times receivables are collected during the yearly exercise.

The algorithm behind this receivables turnover ratio calculator is based on these formulas, while providing the results explained below:

• Receivables turnover ratio = Annual sales on credit / [(Starting receivables balance + Ending receivables balance)/2]

• Average collection period = 365 / Receivables turnover ratio

• Total value of the receivables collected during this fiscal year = Starting receivables balance + Annual sales on credit – Ending receivables balance

• This ratio considers only the sales on credit, thus if the sales on cash are taken into account in the calculation then the relevance of the indicator will be negatively impacted which will result in losing its significance.

• The discounts should be considered when estimating the net accounts receivable.

## The interpretation of the receivables turnover ratio

• In case of a high receivables turnover ratio one of the following conclusions may arise:

- either the company manages to do most of its sales on cash which is a positive sign;

- or that its receivable collection policy is efficient.

• In case of a lower ratio may indicate that the company does not have a proper receivables collection policy, thus the term to collect them is longer which finally results in a higher risk that they will not be collected. In this case the business should reconsider its sales on credit policy in order to diminish the time the credit is offered to its clients.

## Example of a calculation

Let’s assume that a company registers an annual sales credit of \$200,000, while its beginning receivables balance is \$50,000 and its receivables balance at the end of the fiscal year is \$100,000. This will result in these figures:

Receivables turnover ratio: 2.67

Average collection period: 137 days

Total value of the receivables collected during this fiscal year: \$150,000.00

16 Feb, 2015 | 0 comments