Looking at a company’s ratio, relative to that of similar firms, will provide a more meaningful analysis of the company’s performance rather than viewing the number in isolation. It’s useful to compare a company’s ratio to that of its competitors or similar companies within its industry. Therefore, a low or declining accounts receivable turnover ratio is considered detrimental to a company. Due to the time value of money principle, the longer a company takes to collect on its credit sales, the more money a company effectively loses, or the less valuable are the company’s sales. It can sometimes be seen in earnings management, where managers offer a very long credit policy to generate additional sales. This can be due to the company extending credit terms to non-creditworthy customers who are experiencing financial difficulties.Īdditionally, a low ratio can indicate that the company is extending its credit policy for too long. On the other hand, a low accounts receivable turnover ratio suggests that the company’s collection process is poor. Also, a high ratio can suggest that the company follows a conservative credit policy such as net-20-days or even a net-10-days policy. A high accounts receivable turnover also indicates that the company enjoys a high-quality customer base that is able to pay their debts quickly. A high ratio is desirable, as it indicates that the company’s collection of accounts receivable is frequent and efficient. The accounts receivable turnover ratio is an efficiency ratio and is an indicator of a company’s financial and operational performance. Δ Interpretation of Accounts Receivable Turnover Ratio
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If Trinity Bikes Shop maintains a policy for payments made on credit, such as a 30-day policy, the receivable turnover in days calculated above would indicate that the average customer makes late payments.Įnter your name and email in the form below and download the free template now! Therefore, the average customer takes approximately 51 days to pay their debt to the store.
Receivable turnover in days = 365 / 7.2 = 50.69 Receivable turnover in days = 365 / Receivable turnover ratioĭetermining the accounts receivable turnover in days for Trinity Bikes Shop in the example above: The formula for the accounts receivable turnover in days is as follows: The accounts receivable turnover in days shows the average number of days that it takes a customer to pay the company for sales on credit. Therefore, Trinity Bikes Shop collected its average accounts receivable approximately 7.2 times over the fiscal year ended December 31, 2017. John wants to know how many times his company collects its average accounts receivable over the year. Starting and ending accounts receivable for the year were $10,000 and $15,000, respectively. In the fiscal year ended December 31, 2017, there were $100,000 gross credit sales and returns of $10,000. Due to declining cash sales, John, the CEO, decides to extend credit sales to all his customers. Trinity Bikes Shop is a retail store that sells biking equipment and bikes.
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