Small Business Terms: What Is Receivables Turnover Ratio?

by Greg DePersio

0 min read

The receivables turnover ratio is an accounting measure used to quantify and measure a business’s effectiveness is extending credit on purchases and then collecting on that extended credit. Usually this metric is calculated annually, but many businesses perform the calculation monthly or quarterly. Too high or too low of a ratio value can indicate varying problems. A middle-ground number is often desired. The formula for receivables turnover is:

Receivables turnover = net credit sales / average accounts receivables

For example, assume a business has accounts receivable of $200,000 on January 1. It extended $500,000 of credit sales throughout the year. On December 31, it has accounts receivable of $40,000. The receivables turnover is:

$500,000 / (($200,000 + $40,000) / 2) = 4.17

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