Receivables Turnover: Definition, Formula & Example

Instructor: Tammy Galloway

Tammy teaches business courses at the post-secondary and secondary level and has a master's of business administration in finance.

In this lesson, you'll learn the purpose of the receivables turnover, the formula and which financial statements to use to find the data. We'll also discuss the usefulness in calculating the turnover by the number of days.

What Is Receivables Turnover?

Have you been to an electronics store when someone has purchased a large ticket item, such as a TV? When the customer arrives to checkout, the cashier asks, cash or credit? Customers have two options to pay for an item, they can pay cash or charge the purchase and pay for the item over time, this is called credit.

When a business extends credit they create accounts receivables. Accounts receivable are monies owed to the company when they allow customers to pay for purchases over a specified period of time.

The receivables turnover calculates how efficiently a company collects those payments from customers by taking credit sales divided by accounts receivable. You'll need to use the balance sheet and income statement to find the credit sales and accounts receivable. We'll also discuss the usefulness of calculating the receivables turnover in days.

How to Calculate Receivables Turnover

Receivables turnover is calculated through this ratio: credit sales/accounts receivable.

The numerator is credit sales, which can be found on the income statement. It's important to make sure you use the credit sales line item. Sometimes a company may consolidate cash and credit sales together listing only total sales. In this instance, you may have to review the annual report to obtain the credit sales number.

The denominator of the ratio is accounts receivable, which can be found on the balance sheet.

Receivables Turnover Analysis

Let's say a company has $500,000 in credit sales and $100,000 in accounts receivable. This would equal this:

$500,000/$100,000 = 5

In the above example, the receivables turnover of 5 means the company collects account receivables 5 times per year. It shows how efficiently the company collects payments from its customers. Hence, the receivables ratio is categorized as an efficiency ratio.

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