While everyone knows that account receivables are important, not everyone knows that there’s a way to measure how effective you are in managing your receivables. In today’s post, we discuss receivables turnover, starting from a basic definition, and show you how to calculate your receivables turnover ratio.
What Is Receivables Turnover?
Simply put, receivables turnover (or receivables turnover ratio) is a measure of how effective your organization is at collecting its receivables.
A high receivables turnover ratio indicates that a company is collecting its receivables quickly.
On the other hand, a company with a low receivables turnover ratio is inefficient at collecting its receivables.
Needless to say, all organizations aim to have a high receivables turnover ratio!
How to Calculate Receivables Turnover?
The formula to calculate your company’s receivables turnover ratio over a given period of time is simple: just divide your net credit sales during that period by the average accounts receivable.
Let’s unpack each element of the formula:
- Net credit sales: Refers to the amount earned by a company via credit.
- Average accounts receivable: To calculate this value, add the receivables balances at the beginning and end of the period.
Calculating Receivables Turnover Rate: An Example
To illustrate the formula outlined above, an example may be helpful.
Let’s say that you want to calculate your company’s receivables turnover rate for 2021. Your net credit sales that year amounted to $500,000. Your accounts receivables balances were as follows:
- $50,000 on January 1, 2021
- $60,000 on December 31, 2021
First, we have to determine the average accounts receivable, so we add the receivables balance at the beginning of 2021 and the receivables balance at the end of the year. Then we divide the result by two.
50,000 + 60,000 = 110,000
110,000 / 2= 55,000
Now, all we have to do is to divide your net credit sales by the average accounts receivable, so:
500,000 / 55,000 = 9.09
Your receivables turnover ratio was 9.09. This means that your company collected its receivables on average 9.09 times in 2021.
Once you know this, you can use this information to draw some interesting conclusions.
For example, if your company collected receivables 9.09 times in 2021, that means that it took you on average 40 days to collect your receivables (365 / 9 = 40.15).
Factoring: An Easy Way To Improve Your Receivables Turnover
If you are looking for a fast, easy way to improve your receivables turnover rate, look no further than factoring of accounts receivable.
When you factor your receivables, you sell them to a company called a factor that pays you upfront, saving you the hassle of waiting up to 90 days for your clients to pay you.
After paying you, the factor takes care of the collection process in exchange for a small fee, and here’s where things get even better.
If you work with a factor that offers non-recourse factoring like ACS Factors, you are not responsible for any receivables that your clients are unable to pay — it’s the factor’s loss, not yours!
ACS Factors: We Turn Your Invoices Into Cash
We are a Factoring company located in Upland, California, with many clients nationwide in the distribution and logistics corridor which includes Ontario, Riverside, Fontana, Jurupa Valley, and Moreno Valley.
Contact us today by email (firstname.lastname@example.org) telephone (909-946-5599), or through our social media accounts on Facebook, Twitter, and YouTube, and start enjoying the convenience of converting your accounts receivable into cash today!