Small Business Terms: What Is Receivables Turnover Ratio?

By Craig Anthony

0 min read

The receivables turnover ratio is an accounting measure used to quantify and measure a business’s effectiveness is extending credit on purchases and then collecting on that extended credit. Usually this metric is calculated annually, but many businesses perform the calculation monthly or quarterly. Too high or too low of a ratio value can indicate varying problems. A middle-ground number is often desired. The formula for receivables turnover is:

Receivables turnover = net credit sales / average accounts receivables

For example, assume a business has accounts receivable of $200,000 on January 1. It extended $500,000 of credit sales throughout the year. On December 31, it has accounts receivable of $40,000. The receivables turnover is:

$500,000 / (($200,000 + $40,000) / 2) = 4.17

References & Resources

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

Related Articles

What Is a Term Sheet?

From investors to freelance graphic designers, it takes all kinds of people…

Read more

What Are Accruals?

For most small-business owners and independent contractors, the Canada Revenue Agency requires…

Read more