Receivables Turnover

Receivables Turnover [Ratio] (RT) is used to measure how efficiently your company manages its sales on credit. More specifically, how it extends credit and collects debt. In other words, this ratio is the most important KPI for your accounts receivable management system.

RT is calculating by dividing your Net Credit Sales by your Average Net Accounts Receivable for your accounting period (net of bad debts that is). 

Net Credit Sales (or Net Receivable Sales) refers to sales to customers on credit, less all sales returns and sales allowances. Net credit sales by definition do not include any sales for which payment is made immediately in cash. A sales allowance is a reduction in the price charged by a seller, due to a problem with the sold product or service, such as a quality problem, a short shipment, or an incorrect price.

Low RT definitely means that your company has a significant problems with collecting you’re A/R. On your customer debt, that is (by maintaining accounts receivable, firms are indirectly extending interest-free loans to their clients).

In other words, that a large portion of your credit sales ends up stuck in you’re A/R account. Which is pretty bad for your cash flows. Which means that you must (1) reassess your credit extension rules and procedures and (2) improve your collection process.

High RT means that your company and collects well. Whether it sells a lot on credit or not, depends on another financial ratio – your net credit sales to total sales.