Formula for Account Receivable Turnover Ratio: A Key Indicator of Credit Policy

The account receivable turnover ratio is a crucial metric that helps businesses measure their credit policy and assess their ability to collect payments from customers. This ratio provides valuable insights into the effectiveness of a company's credit management strategy, revealing whether it extends too much or too little credit to its customers.

By calculating this ratio, companies can gain a better understanding of their credit sales performance and identify areas for improvement. The formula is straightforward: Receivables turnover ratio = net sales on credit / average receivables. To apply this formula, you need to know the total amount of credit sales made by the company over a specific period (net credit sales value) and the average amount collected from customers during that same period (average receivables value).

This accounting metric is an important indicator of how efficiently companies collect extended credit and short-term payments. If a company allows customers to make purchases on credit, the receivables turnover ratio provides valuable insights into its ability to collect payments promptly.

In essence, the account receivable turnover ratio helps businesses evaluate their credit policy by indicating whether they are extending too much or too little credit to their customers. By analyzing this ratio, companies can adjust their credit management strategy to optimize cash flow and minimize bad debts.

Overall, the account receivable turnover ratio is a useful tool for businesses seeking to refine their credit policy and improve their ability to collect payments from customers.

Formula for account receivable turnover ratio