What is Receivables Turnover Ratio?

Receivables Turnover Ratio gives a snapshot of how well a company does by extending credit.

The ratio is computed by putting the number of credit sales over the total amount of outstanding receivables. If a company is not able to efficiently collect on credit that it has extended to its customers or debtors, it will have a low Receivables Turnover Ratio.

The top number is the amount of new receivable accounts opened during a period, and the lower number is the total number of outstanding receivable accounts. A much larger bottom number suggests that they are not able to efficiently collect on and close their receivables.

This could be due to an ineffective vetting system for deciding who the company should extend credit to. A relatively high Receivables Turnover Ratio is the result of good decision-making and efficient business practices that result in getting payments from such measurements are known as activity ratios, and they can help investors as well as the management of a business find and resolve efficiency issues within the business that may be affecting profitability.

A business with a low enough receivables turnover ratio will be likely to end up settling for much less than they are owed just to close the delinquent accounts and use their resources elsewhere.