Undoubtedly, a tight credit policy saves a firm from bad debts and interest costs, but it may curb sales down. A very high ratio hints at the very tight credit policy of the firm. It would seem a little contradictory to say that even a very high receivable turnover ratio is not good. Very High Receivable / Debtor’s Turnover Ratio Suppose the debtors decrease at the end of the financial year due to some seasonal business effect it would directly improve the ratio, which is valid at that point and not the rest of the year. To avoid the situation of non-availability of ratios, one uses the debtors and receivable closing balances, but this practice would have serious questions on the correctness of the ratio. The first practical question would be – what average should be taken? Weekly, Monthly, or Yearly? Needless to say, that weekly or monthly average would give better results in terms of the correctness of the ratio because of the preciseness of average receivables increases. The credit sales figure is still manageable, but average receivables are complex. These figures are not readily available in the financial statements of a business but had to derive from them along with additional information. We need credit sales and average receivables over the year to calculate the ratio. It is also known as Days Sales OutstandingĪgainst the simplicity of the formula, the calculation and practical usability of this formula have certain questions. Calculate Receivables Turnover & Average Collection Periodĭebtor / Receivable Turnover Ratio = Credit Sales / (Average Debtors + Average Bills Receivables) Formula for Average Collection PeriodĪverage Collection Period = (365 Days or 12 Months) / (Debtor / Receivable Turnover Ratio)įor calculation of the receivable turnover ratio, you can use our of days or months in which the debtors are converted into cash. of times debtors are converted into cash in a financial year, whereas the latter gives no. Both ratios indicate the same thing but in different terms. The receivables turnover ratio has another variant, i.e., the average collection period, which gives a time period in which debtors are converted into cash. Very High Receivable / Debtor’s Turnover RatioĢ Variants – Receivable Turnover and Collection Period.Very Low Receivable / Debtor’s Turnover Ratio.What is Desirable – A Higher or a Lower Receivable Turnover Ratio?.Calculate Receivables Turnover & Average Collection Period.2 Variants – Receivable Turnover and Collection Period.
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