# Receivables Turnover Ratio

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Written By
Dan Buckley
Dan Buckley is an US-based trader, consultant, and part-time writer with a background in macroeconomics and mathematical finance. He trades and writes about a variety of asset classes, including equities, fixed income, commodities, currencies, and interest rates. As a writer, his goal is to explain trading and finance concepts in levels of detail that could appeal to a range of audiences, from novice traders to those with more experienced backgrounds.
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## What Is Receivables Turnover Ratio?

The receivables turnover ratio is a financial ratio that measures the speed at which a company collects its receivables.

This ratio is also known as the receivables turnover rate or the receivables turnover.

The receivables turnover ratio is calculated by dividing a company’s sales that were made on credit by its accounts receivable.

To get days sales outstanding, the resulting number is then divided by 365 to get the number of days, on average, it takes the company to collect its receivables.

## Receivables Turnover Ratio Meaning

A high receivables turnover ratio is indicative of a well-run business that is efficiently collecting its receivables.

A low receivables turnover ratio may indicate that a company is not effectively collecting its payments, which could be a sign of financial trouble.

## Receivables Turnover Ratio – Key Takeaways

1. The receivables turnover ratio is a financial metric used to measure a company’s effectiveness in collecting its receivables.

2. A high receivables turnover ratio indicates that a company is collecting its receivables quickly and efficiently.

3. A low receivables turnover ratio may indicate that a company is having difficulty collecting its receivables.

4. The receivables turnover ratio is calculated by dividing a company’s sales (made on credit) by its average accounts receivable.

5. The receivables turnover ratio can be used to compare companies within the same industry or to compare a company’s performance over time.

## Receivables Turnover Ratio Formula & Equation

To calculate the receivables turnover ratio, you will need the following financial information:

1) Total credit sales – This is the total amount of sales that were made on credit during a given period of time.

2) Accounts receivable – This is the total amount of money that is owed to a company by its customers who have purchased goods or services on credit.

To calculate the receivables turnover ratio:

Receivables turnover ratio = total credit sales / accounts receivable

## Accounts Receivable Days

Another metric that is closely related to the receivables turnover ratio is accounts receivable days.

Accounts receivable days (also called days sales outstanding or DSO) is a measure of how long it takes a company to collect its receivables.

To calculate accounts receivable days, you divide the number of days in a period by the receivables turnover ratio for that period.

For example, if a company had a receivables turnover ratio of 10 and there are 365 days in a year, the company’s accounts receivable days would be 365 / 10, or 36.5 days.

This means that it would take the company an average of 36.5 days to collect its receivables.

## Receivables Turnover Ratio Example

For example, let’s say that Company XYZ had \$1 million in credit sales and \$100,000 in average accounts receivable over its fiscal year.

Receivables turnover ratio = total credit sales / accounts receivable

To calculate the receivables turnover ratio, we would divide \$1 million by \$100,000 to get 10.

In other words, the company converted its receivables to cash 10 times that year.

A company could also determine the average duration of accounts receivable or the number of days it takes to collect them during the year, on average.

In this example above, you divide 365 by 10 to find the average duration, measured in days.

The average accounts receivable turnover would be 365 / 10, which is 36.5 days.

For Company XYZ, customers take an average of 36.5 days to make due on what they paid.

This would mean that if the company had a 30-day payment policy for its customers, the average accounts receivable turnover would show that customers are paying about 6.5 days late.

## Receivables Turnover Ratio Meaning Analysis

In general, a higher receivables turnover ratio is better than a lower receivables turnover ratio.

A high receivables turnover ratio indicates that a company is collecting its receivables quickly and efficiently.

This is generally a good sign for the company’s financial health because it means that the company is generating cash quickly.

A low receivables turnover ratio, on the other hand, may indicate that a company is having difficulty collecting its payments.

This could be one sign of financial trouble for the company.

## Receivables Turnover Ratio Industry Comparisons

When comparing the receivables turnover ratios of different companies, it is important to compare companies within the same industry.

Different industries have different norms for what is considered a “good” receivables turnover ratio.

For example, companies in the retail industry generally have higher receivables turnover ratios than companies in the manufacturing industry because retail companies tend to have shorter terms for their receivables.

Manufacturers and auto OEMs, for example, often see their receivables extend into the 60- to 90-day range.

Therefore, it would not be apples-to-apples to compare the receivables turnover ratios of a retail company and a manufacturing company.

To get a better idea of how a company’s receivables turnover ratio stacks up against its competitors, it is important to compare it with other companies within the same industry.

## Receivables Turnover Ratio vs Days Sales Outstanding

The receivables turnover ratio and days sales outstanding (DSO) are two measures that analysts use to assess a company’s credit and collections management.

The receivables turnover ratio measures the number of times a company collects its receivables during a period.

Days sales outstanding, on the other hand, measures the average number of days it takes the company to collect its receivables.

Both ratios can give you insights into how well a company is managing its receivables.

## FAQs – Receivables Turnover Ratio

### What is the receivables turnover ratio?

The receivables turnover ratio offers an indication of how quickly a company is able to collect its receivables. The receivables turnover ratio is calculated by dividing credit sales by accounts receivable.

A higher receivables turnover ratio is generally better than a lower receivables turnover ratio because it indicates that the company is generating cash quickly.

### How do you interpret the receivables turnover ratio?

In general, a higher receivables turnover ratio is better than a lower receivables turnover ratio because it means that the company is collecting its receivables quickly and efficiently.

However, it is important to compare the receivables turnover ratio of different companies within the same industry because different industries have different norms for what is considered a good receivables turnover ratio.

### What is a good accounts receivable turnover ratio?

There is no definitive answer to this question because different industries have different norms for what is considered a “good” receivables turnover ratio.

In general, a higher receivables turnover ratio is better than a lower receivables turnover ratio because it means that the company is getting cash in quickly.

However, it is important to compare the receivables turnover ratios of different companies within the same industry to get a better idea of how the company’s ratio stacks up against its competitors.

### How to improve receivables turnover ratio?

There are a few different ways that a company can improve its receivables turnover ratio:

• Offer discounts for early payment
• Extend the credit terms for slower-paying customers
• Implement a collections policy for overdue receivables
• Use customer segmentation to tailor credit terms to different types of customers

### What does a higher accounts receivable turnover ratio mean?

A higher accounts receivable turnover ratio means that a company is collecting its receivables quickly and efficiently.

## Conclusion – Receivables Turnover Ratio

The receivables turnover ratio is a financial metric that measures how quickly a company is able to collect its receivables.

A high receivables turnover ratio is generally indicative of a well-run business.

However, it is important to compare the receivables turnover ratios of different companies within the same industry because different industries have different norms for receivables collection.