Receivables turnover ratio (also called as accounts receivable turnover) is a financial ratio that measures how efficiently company collects its receivables. If receivables turnover is very low, it means company has a lot of receivables compared to its sales, which means that management of receivables is not very efficient.
Inefficient receivables management costs money for the company, although indirectly. Receivables are part of working capital and efficient receivables management allows saving some capital costs. It is easy to understand in example: company owes $100,000 debt to a bank and pays 10% interest rate for it, and at the same time it has $50,000 receivables from the clients on average during a year. If company could lower receivables to $20,000 it could pay part of a debt to the bank at it would save $3,000 yearly that are paid for interest ($50k - $20k = $30k*10% = $3k).
Receivable turnover analysis
When receivable turnover ratio is compared to other companies, it is very important that other companies used for comparison would have their activity in the same region and in the same market niche. Receivables turnover ratio may be very different for different market segments. Also the timing should be the same because during difficult economical period companies usually are behind the schedule in paying debts so it will look this ratio worse than under normal conditions.
Yet, low accounts receivables turnover doesn’t mean that company’s management is inefficient. To allow longer payment period for the clients might be the element of sales strategy which sometimes may bring more benefit that little more efficiency in working capital management.
Another financial ratio used for receivables management analysis is 'Average collection period'.
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