Receivables Turnover

Definition

Receivables turnover is a financial ratio that measures how efficiently a company collects its accounts receivable. It indicates how many times a company's receivables are converted into cash over a given period, typically one year. This metric is particularly important in the context of common-size statements, as it provides insights into a company's working capital management and liquidity position.

5 Must Know Facts For Your Next Test

1. Receivables turnover is calculated by dividing net credit sales by average accounts receivable.
2. A higher receivables turnover ratio indicates that a company is more efficient in collecting its accounts receivable, which can improve its cash flow and liquidity.
3. Receivables turnover is an important metric in common-size statements because it provides insights into a company's working capital management and its ability to convert sales into cash.
4. Factors that can influence a company's receivables turnover include its credit policies, customer payment terms, and the effectiveness of its collection efforts.
5. Receivables turnover can be compared to industry benchmarks or a company's historical performance to assess its relative efficiency in managing accounts receivable.

Review Questions

• Explain how receivables turnover is calculated and why it is an important metric in the context of common-size statements.
  • Receivables turnover is calculated by dividing a company's net credit sales by its average accounts receivable. This ratio is important in the context of common-size statements because it provides insights into a company's working capital management and liquidity. A higher receivables turnover ratio indicates that a company is more efficient in collecting its accounts receivable, which can improve its cash flow and ability to meet short-term obligations. Analyzing a company's receivables turnover in relation to industry benchmarks or its own historical performance can help assess its effectiveness in managing its accounts receivable.
• Describe the factors that can influence a company's receivables turnover and how these factors might be reflected in common-size statements.
  • Several factors can influence a company's receivables turnover, including its credit policies, customer payment terms, and the effectiveness of its collection efforts. These factors can be reflected in common-size statements through changes in the relative size of accounts receivable and cash flow from operating activities. For example, a company with more lenient credit policies or ineffective collection practices may have a lower receivables turnover ratio, which could be indicated by a larger proportion of accounts receivable on the balance sheet and potentially lower cash flow from operations on the cash flow statement. Analyzing these relationships can provide insights into a company's working capital management and liquidity.
• Evaluate how a company's receivables turnover ratio might be used to assess its overall financial health and performance in the context of common-size statements.
  • A company's receivables turnover ratio can be a valuable tool for assessing its overall financial health and performance in the context of common-size statements. A high receivables turnover ratio indicates that a company is efficiently converting its sales into cash, which can improve its liquidity and working capital management. This, in turn, can be reflected in a higher proportion of cash and a lower proportion of accounts receivable on the common-size balance sheet. Additionally, a higher receivables turnover ratio may be associated with stronger cash flow from operations on the common-size cash flow statement, as the company is more effectively collecting payments from its customers. By analyzing the receivables turnover ratio in conjunction with other common-size financial statements, investors and analysts can gain a more comprehensive understanding of a company's financial performance, operational efficiency, and overall financial health.

Related terms

Accounts Receivable: Accounts receivable represent the money owed to a company by its customers for goods or services provided on credit.

Working Capital: Working capital is the difference between a company's current assets and current liabilities, and it measures a company's ability to meet its short-term obligations.

Liquidity: Liquidity refers to a company's ability to convert its assets into cash to pay its short-term liabilities when they come due.