One of the concerns that many businesses face is how to increase revenue, especially receivables from customers. How can revenue be optimized? The following article Filipinance.com has a look at what is the receivable turnover of the business, how to calculate the receivable turnover for you to better understand.
Table of Contents
- 1 What is the accounts receivable turnover?
- 2 Formula and calculation of accounts receivable turnover
- 3 What is the meaning and role of receivables turnover?
- 4 How much receivables turnover is reasonable?
- 5 Drawbacks of the accounts receivable turnover index
- 6 Conclusion
What is the accounts receivable turnover?
This index is a calculation in accounting, this cycle helps to check the efficiency of the company when it has to collect receivables including debts owed by customers.
The accounts receivable ratio shows how efficiently a company is at granting credit to its customers while also being able to collect short-term debts.
Formula and calculation of accounts receivable turnover
You can better understand this index through the following formula and calculation:
Accounts Receivable Turnover = Net Credit Sales / Average Accounts Receivable.
Instructions for calculating the amount of spins payable
To make it easier to understand, you can follow these steps:
Step 1: First determine the net credit sales. It is sales for the year determined on credit/on credit, as opposed to cash. This number is calculated using total sales, minus interest, other allowances.
Businesses can calculate net credit sales by balancing their accounts and reporting their income for the year.
Step 2: Determine the average of receivables, which is the amount that is related to the amount of money customers owe you. From there to find the average receivable, it is necessary to take the number of accounts receivable at the beginning of the year and then add the values of the business’s receipts at the end of the year divided by 2 to get the average receivables result.
Like net credit sales, the above figures can be found through the balance sheet, the income statement for the year.
Step 3: Divide net credit sales by average receivables. Once you have the above 2 figures, you can easily calculate the number of revenue rotations easily. From there, the credit efficiency of the business can be seen because excluding cash, cash cannot create receivables.
What is the meaning and role of receivables turnover?
In addition to calculating the rotation need to understand more about its meaning, what is its role?
The key benefits of high receivables turnover are:
- The cash flow of the business increases when the customers pay the credit.
- Not too much bad debt.
- Free up your credit line for future transactions.
But if this index is too high, it also means that the credit policy of the business only cares about cash flow. Customers whose credit has been collected may be unhappy, upset, and the business will miss out on future customers.
At that time, businesses need to change policies, pay more attention to customer behavior and experience.
This ratio is low, reflecting that the business cannot collect credit receivables from related transactions or debts. This negatively affects the business’s sales and capabilities:
- It is the way corporate credit is given that is not effective.
- Increasing bad debt status as well as the ability to control cash flow is more difficult.
- Like the high accounts receivable turnover ratio, it is difficult for customers to pay off credit. This makes it difficult for them to purchase or transact later.
- In addition, it is also related to many other problems, adversely affecting the business. If this coefficient is extremely low, businesses need to change their policies and pay attention to customers in a realistic way, thereby increasing revenue for the business.
How much receivables turnover is reasonable?
For each industry, the receivables turnover ratio has different regulations, so it is impossible to determine the exact coefficient.
From there, the assessment of management effectiveness when collecting receivables and debts from customers must compare the average number of days of collection with the number of days of payment for receivables as prescribed by the enterprise.
Accounts turnover helps businesses measure a company’s efficiency when it comes to collecting fees. From that turnover ratio, businesses will have appropriate credit recovery policies to maintain the company’s business performance.
Drawbacks of the accounts receivable turnover index
Although this coefficient helps you to detect operational trends, thereby devising a business strategy. But failed to detect or identify bad debt accounts or customers that needed specific review or overdue accounts and customers.
In addition, these revenues can change throughout the year, the calculation based on the start and end dates of the year will be difficult to be completely accurate. Finally, it is still advisable to compare this coefficient with enterprises in the same industry, with similar products with the same scale and similar business models.
Hopefully through the above sharing about the receivables turnover of Filipinance.com you can have more useful information about the financial field. From there run the business smoothly and successfully.