What is receivables turnover? Calculation formula and meaning

In business, financial management plays a key role in helping businesses maintain and grow. One of the important indicators to evaluate financial management effectiveness is: Viindoo Accounting software supports improving the receivables turnover index. Learn more about this in the following article!

1. What is receivables turnover?

Receivables turnover is an index that measures the number of times a business converts receivables into cash in a certain period of time. This is an important index to evaluate the effectiveness of debt collection from customers.

Businesses often calculate receivables turnover monthly or quarterly to promptly assess the debt collection situation. In addition, calculating by year helps businesses have an overview of the debt collection situation during the year and adjust strategies for the following years.

2. Formula to calculate accounts receivable turnover

How to calculate accounts receivable turnover:

Accounts receivable turnover = Net credit sales / Average accounts receivable balance

In there:

Net credit sales: Total revenue generated during the period has been collected in cash.

Average accounts receivable balance: Average of accounts receivable at the beginning and end of the period, divided by 2.

3. Meaning of receivables turnover

Receivables turnover evaluates a business's credit policy, an important factor affecting revenue, profits and solvency. Appropriate credit policies attract potential customers, helping to increase revenue and profits.

A high receivables turnover index shows that businesses effectively collect debts, improving cash flow to pay short-term debt and make business investments. Conversely, a low index may be due to allowing customers to pay slowly. This reduces cash flow efficiency and increases the risk of bad debt, affecting the solvency of the business.

4. How much receivable turnover is good?

The determinant of receivables turnover ratio depends on many factors. Holding too tight can negatively affect the business, while collecting debt too loosely leads to limited cash flow.

In general, higher numbers are better. This shows customers pay on time and debt is properly collected, indicating a strong balance sheet, stronger credit exposure and balanced asset turnover.

Turnover ratio WITH The ideal Account Receivable depends on your industry. A high AR turnover ratio shows that businesses are careful in extending credit and actively collecting debts.  

A high AR ratio is beneficial for a business's cash flow, but can affect the quality of customer service. A high index also indicates that the company's customers are of high quality or that the company operates primarily on a cash basis.t.

In some cases, lower rates can help you get more customers. However, persistently low ratios indicate that AR is being poorly managed or that the company is extending credit too easily. This could also mean that the business serves a customer base that is at high financial risk or is affected by a major economic event.

A persistently low receivables turnover ratio indicates that the company's invoice terms are too long and that its credit policy needs to be controlled. This sometimes happens when sales teams extend credit terms to fulfill a deal.

Finally, the time value of money principle states that the longer it takes to collect credit sales, the more money the company loses. Therefore, a reduced AR turnover rate is considered detrimental to the financial health of the company. Periodically comparing your AR turnover rate to your industry competitors will provide a more meaningful analysis of performance than just relying on a single number.

5. Some ways to improve receivables turnover index

If your AR turnover rate is low, adjust your credit and collection policies immediately to maintain positive business cash flow. Here are some tips to help you improve your receivables turnover ratio:

• Issue invoices regularly and accurately: Ensure invoices are sent promptly and without errors. Use accounting software to automate this process, avoid errors and minimize payment delays.
• Offers many payment methods: Allow customers to pay via multiple methods such as credit card, bank transfer or check to increase the likelihood that they will pay faster.
• Specify payment terms: Payment terms must be clearly stated in all agreements, contracts and invoices for customers to understand and comply with.
• Payment reminder: Set up an automatic reminder and notification system to track the payment collection process. Be proactive in reminding but don't bother customers.
• Consider early payment discounts: Encourage customers to pay early by offering discounts. This is an effective strategy to improve cash flow.
• Using Viindoo Accounting software: Viindoo Accounting online accounting software automates the entire accounting process, supporting effective planning. With the ability to control data throughout and transparently, Viindoo Accounting ensures real-time accuracy.

Management and optimization receivables turnover Helps businesses improve cash flow and enhance financial stability. By applying effective management strategies, businesses can minimize risks, optimize debt collection processes and ensure sustainable development. Hope this article by Viindoo helps!