What's Net Receivables Turnover Flow? How do you calculate it?

Answer 1

Accounts Receivable turnover is measured by Net Sales/AR. You can use ending AR, but it's more accurate if you use average AR, i.e., the average of beginning and ending AR. The Accounts Receivable Turnover measures the number of times Accounts Receivable were collected during the year. This is also a measure of how well the company collects sales on credit from its customers, just as Average Collection Period measures this in days (see below)

A high, or increasing Accounts Receivable Turnover is usually a positive sign - showing the company is successfully executing its credit policies and quickly turning its Accounts Receivables into cash. A possible negative aspect to an increasing Accounts Receivable Turnover is the company may be too strict in its credit policies and missing out on potential sales.

Average Collection Period (in days) is AR divided by Average Daily Sales. The Average Collection Period measures the average number of days it takes for the company to collect revenue from its credit sales. The Average Daily Sales is the Net Sales divided by 365 days in the year. The company will usually state its credit policies in its financial statements, so the Average Collection Period can be easily gauged as to whether or not it is indicating positive or negative information.

This ratio reflects how easily the company can collect on its customers. It also can be used as a guage of how loose or tight the company maintains its credit policies. A particular thing to watch out for is if the Average Collection Period is rising over time. This could be an indicator that the company's customers are in trouble, which could spell trouble ahead. This could also indicate the company has loosened its credit policies with customers, meaning that they may have been extending credit to companies where they normally would not have. This could temporarily boost sales, but could also result in an increase in sales revenue that cannot be recovered, as shown in the Allowance for Doubtful Accounts.

Answer 2

How quickly customers are paying.

Equation: Net sales divided by receivables

Generally speaking, the greater the number, the better. It is a positive sign which shows the company is having good success on collection of its receivables.