Month End Glossary

Receivables Turnover Ratio

Receivables Turnover Ratio measures how efficiently a company collects its outstanding receivables within a certain period.

Receivables Turnover Ratio determines how often a company collects its average accounts receivable during a specific period, typically a fiscal year. It is calculated as net credit sales divided by the average accounts receivable. A high ratio indicates efficient collection of receivables, whereas a low ratio may suggest inefficiencies or potential issues with credit policies. For example, a company with $1,000,000 in credit sales and an average receivable of $100,000 would have a ratio of 10, meaning it collects its average receivable ten times a year. This metric helps businesses understand their cash flow cycles and effectiveness in credit management, key components for financial planning.

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