4.27 : Activity Ratios: Accounts Receivable Turnover Ratio

The accounts receivable turnover ratio, or the debtor turnover ratio, measures how promptly a company manages credit extended and collects debts. It quantifies a company's ability to collect outstanding dues from its debtors and clients timely. This ratio represents the number of times receivables are converted to cash within a specific period.

A high turnover ratio indicates efficient collection practices and reflects the company's ability to attract and retain creditworthy customers. Conversely, a low ratio suggests inefficiencies in the collection process or that the company is dealing with customers who may not be financially stable or creditworthy.

The accounts receivable turnover ratio is calculated by dividing net credit sales by the average accounts receivable over a given period. Net credit sales are preferable to total sales, as this provides a more accurate representation of the company's performance. The average accounts receivable is typically determined by adding the opening and closing balances of accounts receivable and dividing its sum by two.

While this ratio is a valuable indicator of a company's operational efficiency, it should not be used in isolation, as it does not reflect the quality or profitability of those credit sales.