What Is the Receivables Turnover Ratio?

The receivables turnover ratio is an accounting measure used to quantify a company's effectiveness in collecting its accounts receivable, or the money owed by customers or clients. This ratio measures how well a company uses and manages the credit it extends to customers and how quickly that short-term debt is collected or is paid. A firm that is efficient at collecting on its payments due will have a higher accounts receivable turnover ratio.

KEY TAKEAWAYS

The accounts receivable turnover ratio is an accounting measure used to quantify a company's effectiveness in collecting its receivables or money owed by clients.

A high receivables turnover ratio may indicate that a company’s collection of accounts receivable is efficient and that the company has a high proportion of quality customers that pay their debts quickly.

A low receivables turnover ratio could be the result of inefficient collection, inadequate credit policies, or customers who are not financially viable or creditworthy.

A company’s receivables turnover ratio should be monitored and tracked to any trends or patterns.

High Receivables Turnover

A high receivables turnover ratio can indicate that a company’s collection of accounts receivable is efficient and the company has a high proportion of quality customers that pay their debts quickly. A high receivables turnover ratio might also indicate that a company operates on a cash basis.

A high ratio can also suggest that a company is conservative when it comes to extending credit to its customers. Conservative credit policy can be beneficial since it could help the company avoid extending credit to customers who may not be able to pay on time.

On the other hand, if a company’s credit policy is too conservative, it might drive away potential customers. These customers may then do business with competitors who will extend them credit. If a company is losing clients or suffering slow growth, they might be better off loosening their credit policy to improve sales, even though it might lead to a lower accounts receivable turnover ratio.

Low Accounts Turnover

A low receivables turnover ratio might be due to an inadequate collection process, bad credit policies, or customers that are not financially viable or creditworthy.

Typically, a low turnover ratio implies that the company should reassess its credit policies to ensure the timely collection of its receivables. However, if a company with a low ratio improves its collection process, it might lead to an influx of cash from collecting on old credit or receivables

Special Considerations

Any comparisons of the turnover ratio should be made with companies that are in the same industry and, ideally, have similar business models. Companies of different sizes may often have very different capital structures, which can greatly influence turnover calculations, and the same is often true of companies in different industries.

Lastly, a low receivables turnover might not necessarily indicate that the company’s issuing of credit and collecting of debt is lacking. For example, if the company's distribution division is operating poorly, it might be failing to deliver the correct goods to customers in a timely manner. As a result, customers might delay paying their receivables, which would decrease the company’s receivables turnover ratio.