The accounts receivable turnover ratio is nothing but the ratio of the number of times that accounts receivable is collected throughout the year. A high accounts receivable turnover ratio indicates tight credit policies.
On the other hand, low or declining accounts receivable turnover ration indicates a collection problem, part of which may be due to bad debts.
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To put it in simple terms, the higher the turnover ratio, the faster a business is collecting its receivables and the more cash the client generally has on hand.
To determine the turnover ratio for external comparisons, the total sales will have to be divided by the receivables. The value obtained can then be compared to industry standards to gauge as to where the business currently stands relative to industry norms. This will help in shaping future plans of action.
For internal evaluation, the turnover ratio can be determined by dividing the credit sales by the average accounts receivable. This value is the true turnover rate. This value can be compared to a value from the past or to a certain budget.
This value is also used in order to calculate other measurements that are used to determine a company's financial and operational performance.
The receivables turnover ratio is also used as a means of measuring how efficiently a firm uses its assets. By maintaining accounts receivable, businesses are indirectly extending interest free loans to their clients.
A high receivables turnover ratio can mean that a company operates on a cash basis or that the extension of credit and the collection of the accounts receivable of that business or company is efficient.
A low receivables turnover ratio means that the business should reexamine its credit policies to ensure the timely collection of imparted credit, which will help in earning interest for the firm.
The ratio is an important indicator of the performance and health of any company or business.
Turnover Ratio of Accounts Receivable LOWES ONLINE APPLICATION
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