What is receivables turnover? Calculation formula, meaning and examples

In the financial sector, receivables turnover helps businesses evaluate their ability to collect debt from customers, thereby devising wise financial strategies. In this article, 1C Vietnam will provide comprehensive knowledge about receivables turnover and practical examples, helping businesses better understand this indicator.

1. What is receivables turnover?

Receivables turnover is an important financial ratio used to measure the average number of times accounts receivable from customers are converted into cash during a given period. This index plays an essential role in evaluating the effectiveness of a business's debt management, demonstrating its ability to recover capital and optimize cash flow in business activities.

2. How to calculate receivables turnover accurately

The formula for calculating receivables turnover is determined as follows:

Receivables turnover = Net credit sales / Average receivables

In there:

• Receivables turnover : Number of times receivables are converted into cash in a period of time (month/quarter/year)
• Net credit sales: Is the cash sales the following day, calculated according to the formula: Net credit sales = Total credit sales - Returned sales - Allowances sell
• Average receivables : Is the average value of receivables at the beginning and end of the period, calculated according to the formula: Average receivables = (Receivables at the beginning of the period + Receivables at the end of the period) / 2

Thus, businesses apply the method of calculating receivables turnover using the following formula:

Receivables turnover = (Credit sales - Return sales - Sales allowance) / (Beginning receivables + Ending receivables) / 2

From this formula, it can be seen that net credit sales and average receivables are two important factors. These indicators need to be taken from the balance sheet and closely monitored and controlled by leaders to ensure receivable turnover is at a reasonable level.

3. Receivables turnover example

As of December 30, 2023, XYZ Company Limited has a customer receivable balance of VND 200 million on the balance sheet, while the total revenue of the fiscal year 2023 is VND 900 million, with VND 300 million from Sales revenue has been collected. According to the balance sheet dated December 30, 2023, the customer receivable balance is 100 million VND.

To determine the number of receivables turnover in 2023, we perform the following steps:

• Net credit sales revenue in 2023: 900 - 300 = 600 million VND.
• Average value of receivables in 2023: (200 + 100)/2 = 150 million VND.
• Receivable turnover ratio of company XYZ in 2023: 600/150 = 4 times.

4. What does accounts receivable turnover mean?

Receivables turnover is an important metric, helping businesses evaluate the effectiveness of debt management from customers and optimize cash flow. This index has a key meaning in optimizing a business's cash flow:

• Debt collection efficiency: This index reflects a business's ability to collect debt. High receivables turnover shows that debt collection is taking place quickly.
• Maintaining working capital: Receivables turnover also demonstrates the ability of a business to maintain working capital. A high index shows that working capital is continuously released and reinvested in business operations, reducing the risk of capital shortages.
• Evaluate credit policy: This index evaluates credit policy, affecting revenue, profit and solvency of the business.
• Controlling bad debt: The lower the receivable turnover, the more difficult it is to control bad debt. This may be because businesses allow late payments, leading to increased bad debt and affecting solvency.

5. What is a good number of accounts receivable turnover?

Determining the "good" or "bad" level for the receivables turnover index does not have a fixed number, but depends on many factors, requiring businesses to have in-depth analysis and evaluation. Based on professional financial knowledge. However, there are some things businesses need to pay attention to:

• A higher turnover represents a faster debt recovery rate from customers, which is also a positive sign. Conversely, low turnover can indicate difficulty collecting debt, causing cash flow problems.
• Debt recovery speed depends on the credit policy of the business and the industry in which it operates. Therefore, it is advisable to compare receivables turnover between businesses in the same industry.

6. Limit receivable turnover

Receivables turnover is a useful tool to help evaluate the effectiveness of debt management, however, there are also certain limitations that need to be noted by businesses to get the most accurate assessment:

• Limited scope of assessment: The receivables turnover index only measures the speed of converting receivables into cash in a certain accounting period, and does not fully reflect the debt collection situation due to the influence influenced by many other factors such as credit policy, customer quality,...
• Easily affected by external factors: Sales fluctuations, credit policy changes, customer quality decline,... can all distort the account turnover ratio calculation results. Receivables.
• Difficulty in comparison: The receivables turnover ratio can vary significantly between businesses due to different industry characteristics, scale of operations, and financial management policies. Directly comparing this ratio between businesses without considering these factors can lead to misleading assessments.

7. Instructions for analyzing receivables turnover

Analyzing receivables turnover helps evaluate a business's effectiveness in collecting debt from customers, thereby providing appropriate credit management strategies. Below is a detailed guide to help administrators analyze receivables turnover quickly and effectively. Details on how to analyze receivables turnover:

• Evaluate results: High turnover indicates good debt collection ability, but also depends on the industry and specific conditions.
• Compare with competitors: Compare with companies in the same industry to measure performance.
• Watch the trend: A gradual decline in receivables turnover can be a sign of collection difficulties.
• Find out the influencing factors: If the turnover is not as expected, factors such as debt management quality or credit policy should be considered.
• Consider risks: High turnover can be due to loose credit policies, increasing revenue by extending credit to customers, but also has the potential to lose capital due to bad debt.

Above is all the information about receivables turnover , from definition, calculation to meaning and illustrative examples. Hopefully, the information shared by 1C Vietnam has helped organizations better understand this index and how to apply it in evaluating the financial situation of businesses. If you have any questions, please contact 1C Vietnam to receive detailed and quick support. 1C Vietnam is always ready to answer any questions and provide detailed information to help your business operate more efficiently.