The value of ordinary net sales looks at the gross amount of your sales after returns, allowances, and discounts are subtracted. In both formula options, you will see the net credit sales as a part of the equation. However, if you don’t know the average accounts receivable for that period, then you can use the formula below which accounts for that: The average accounts receivable is the average balance of funds you’ve collected from clients (who had a credit line with you) for that period of time. If you know the average accounts receivable for the company, you can use the following formula: There are two possible equations for calculating the receivables turnover ratio. The receivables turnover would help them to know how quick they were at turning the lines of credit into cash by collecting it from the customers. This ratio answers the question, “am I getting paid for the sales I make on credit?”.įor instance, if a company sells products on lines of credit to 5 people, they would not immediately receive the cash flow for those products. For a receivables turnover, you are examining a company’s efforts to convert incoming debt from their accounts receivables into cash sales. In financial terms, a “turnover” is the action of converting a potential sale (credit lines or inventory) into a cash sale.
It is expressed as a ratio that examines how often you are able to recover that money, compared to customers who you are not able to collect from in a timely manner. The accounts receivables turnover is a calculation to measure how successful a company is in collecting money owed to them from customers.
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