Accounts Receivable Turnover (Times)
Accounts Receivable Turnover (Times) – an activity ratio measuring how many times a dollar of the accounts receivable can be turned by a company into cash. In other words, it estimates how efficiently the firm works with its debtors by showing the number of the accounts receivable turns, or how many times the company’s debtors have paid all of their debt to the firm. This ratio can be computed by dividing the company’s net sales by it’s average total receivables.
It's hard to draw a straightforward conclusion on the accounts receivable turnover influence on the financial condition of a company. On the one hand, debtors divert enterprise funds. This can lead to an increase in the finance expenses due to the necessity of an additional credit funds involvement. But as long as the company follows the consistent marketing policy of providing the consumer loans for goods and services, it can expect the increase of the sales volume. In case financial result generated by such actions exceeds the expenses for credit resources, this policy leads to the increase of the comprehensive income of a company. Considering mentioned above we can conclude, that the accounts receivable turnover decline can have a negative impact on the company's financial condition; at the same time, the accounts receivable amount increase can have a positive impact on the company's revenue.
The normative values for the accounts receivable turnover ratio vary depending on the industry. However, in most cases an increase of the number of times the accounts receivable turn per year is a positive trend for a company. For some of the main industries normative values of this indicator can be found in the table below:
|Indicator||Agricultural production||Oil and Gas Extraction||Electric Power Generation, Transmission and Distribution||Construction of Buildings||Miscellaneous Store Retailers||Religious, Grantmaking, Civic and Professional Organizations|
|Accounts Receivable Turnover (Times)||>= 10,3||>= 4,9||>= 6,2||>= 10,4||>= 11,2||>= 12,1|
Source: Almanac of Business and Industrial Financial Ratios
Like all the other activity ratios, the accounts receivable turnover values should be compared to main competitors and average industry values. This would let to make more precise conclusions on the current indicator value influence on the company's financial condition.
Resolving the problems with the accounts receivable turnover exceeding the normative range:
A common problem for many enterprises is the decrease in the accounts receivable turnover. If such a problem arises once, it is necessary to activate the accounts receivable collection process. If the problem is systematic, it is necessary to create a complex and determined policy of providing clients with consumer loans. For example, all clients of the company can be divided into groups, depending on the collaboration history, their importance to the firm, current financial condition, etc. Also, the company’s behavior style should be chosen: conservative, normal or aggressive. Depending on this, the choice has to be made: will the company provide loans only to reliable clients (conservative behavior) or it will attempt to maximize the sales volume and will provide loans to all the clients, except potential bankrupts (aggressive behavior).
Accounts Receivable Turnover (Times) = Net Sales ÷ Average Net Receivables
Accounts Receivable Turnover (Times) = 360 ÷ Accounts Receivable Turnover (Days)
Accounts Receivable Turnover (Times) (Year 1) = 3351 ÷ 266 = 12,5
Accounts Receivable Turnover (Times) (Year 2) = 3854 ÷ 325 = 11,8
The year 1 accounts receivable turnover of 12,5 indicates that company collected its receivables 12,5 times that year. The higher the turnover is the faster the collection process. Each dollar invested in accounts receivable generated $11,8 in sales in year 2.
For company's suppliers and other creditors it is preferable to observe the stable dynamics of the accounts receivable turnover (times) ratio since it indicates the predictable credit policy of the company. For the company low receivables turnover ratio usually means it should reconsider its approach to the accounts receivable collection policy since the overdue accounts are not taking part in earning interest. To draw a precise conclusion on the accounts receivable turnover ratio of a firm, it should be compared with industry averages.