Receivables Turnover Ratio

Receivables turnover ratio

Total operating revenues divided by average receivables. Used to measure how effectively a firm is managing its accounts receivable.

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Receivables Turnover Ratio

A measure of how efficiently a business collects its accounts receivable. This is calculated by multiplying the total amount in credit sales over a given period and dividing by the amount of accounts receivable over the same period. The shorter the duration before collection of accounts receivable, the more likely a business is to remain solvent. The receivables turnover ratio is also a way to determine how a business' credit risk compares to that of its competitors. It is also called accounts receivables turnover.

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Receivables Turnover Ratio

What Does Receivables Turnover Ratio Mean?

An accounting measure used to quantify a firm's effectiveness in extending credit and collecting debts. The receivables turnover ratio is an activity ratio, measuring how efficiently a firm uses its assets. It is calculated as shown here:

Some companies' reports will only show sales—this can affect the ratio depending on the size of cash sales.

Investopedia explains Receivables Turnover Ratio

By holding accounts receivable on their books, companies are indirectly extending interest-free loans to their clients who haven't paid for their goods yet. A high ratio implies either that a company operates on a cash basis or that its extension of credit and collection of accounts receivable are efficient. A low ratio implies that the company should reassess its credit policies to ensure the timely collection of accounts receivable.

Related Terms:
• Accounts Payable—AP
• Accounts Receivable—AR
• Balance Sheet
• Income Statement
• Net Sales