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The receivables turnover ratio formula , sometimes referred to as accounts receivable turnover, is sales divided by the average of accounts receivables.
Sales revenue is the amount a company earns in sales or services from its primary operations. Sales revenue can be found on a company's income statement under sales revenue or operating revenue.
Average accounts receivable in the denominator of the formula is the average of a company's accounts receivable from its prior period to the current period. For example, if a company has $200,000 in accounts receivables at the end of one period and had $150,000 of accounts receivables ending in the prior period, the average would be $175,000. Accounts receivables can be found on a company's balance sheet.
The receivables turnover ratio is used to calculate how well a company is managing their receivables. The lower the amount of uncollected monies from its operations, the higher this ratio will be. In contrast, if a company has more of its revenues awaiting receipt, the lower the ratio will be.
Although the formula for the receivables turnover ratio is fairly simple, applying the ratio in a particular situation to determine efficiency can become more complex. A company needs to collect revenues in order to cover expenses and/or reinvest. A lack of collecting sooner is potentially a loss of future earnings from reinvesting. However, customers may look to competitors if the collection is overbearing.
Suppose that the income statement from a company shows operating revenues of $1 million. The same company has accounts receivables of $80,000 this period and $90,000 the prior period. The average accounts receivables is $85,000 which can be divided into the $1 million for a ratio of 11.76.
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