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# Receivable Turnover Ratio and Collection Period Calculator

Receivable turnover ratio calculator calculates accurately the ratio with the basic inputs like net credit sales, beginning and ending net receivables, no. of days in the period. It does not only calculate the receivable turnover ratio in times but also calculates the collection period in days.

## What is Receivable Turnover Ratio and Collection Period?

When a company engages in credit sales, the account receivables increase with sales and again reduce on clearing payment. This cycle continues several times in a year. For example, if a customer pays money in 3 months, this customer will have 4 such cycles in a year. The receivable turnover ratio is the ratio that suggests on an average how many times such cycle is rotated normally in a year. In our example, the receivable turnover ratio is 4 and the collection period is 3 months for that particular customer. When calculating this for a business where there are a number of customers with different credit terms, this ratio represents an average of all those customers and their different terms.

## Formula

Following are the 2 variants of the formula for calculating receivable turnover ratio:

1. Receivable Turnover Ratio = Credit Sales / Average Bills Receivables  OR
2. Receivable Turnover Ratio = Credit Sales / {(Beginning Net Receivables + Ending Net Receivables)/2}

Following are the 2 variants of the formula for calculating collection period:

1. Average Collection Period = 365 Days / Receivable Turnover Ratio OR
2. Average Collection Period = 12 Months / Receivable Turnover Ratio

## Example

Assume a corporation with following metrics:

Revenue Break Up:

Credit Sales: \$20 Million, Cash Sales: \$2 Million, Total Revenue: \$22 Million

Receivable Balances:

Beginning: \$4 Million, Ending: \$6 Million

Receivable Turnover Ratio = Credit Sales / {(Beginning Net Receivables + Ending Net Receivables)/2}

= 20/{(4+6)/2} = 20/5 = 4 Times

Average Collection Period = 365 Days / Receivable Turnover Ratio = 365 / 4 = 91.25 Days ~ 3 Months

## About the Calculator / Features

Receivable turnover ratio calculator uses the variant 2 for calculating the receivable turnover ratio and variant 1 for calculating the collection period. It accurately calculates the metrics using the required inputs.

## How to Calculate Using the Calculator?

For calculating receivable turnover ratio and collection period, the user must accurately input following components of the formula:

Net credit sales: It means only credit sales should be entered here net of returns etc.

Beginning Net Receivables: Beginning balance of the accounts receivables in the balance sheet.

Ending Net Receivables: Ending balance of the accounts receivables in the balance sheet.

No. of days in the period: Normally it is 365 days barring some exceptions whose financial year are of say 18 months in place of normal 12 months.

Caution:

Here, the yearly average of receivables is taken for the sake of ease and for easy availability of the figures from the financial statements. If such averages are available for a shorter period like monthly, weekly, daily etc, they would serve the purpose better. If for some reason, the receivable balance decreases sharply just before closing of the year, as a result it will hamper the whole calculation.

## Interpretation of the Results

In normal circumstances, even a high school going student would say that the receivable turnover ratio should be as high as possible.

Low Ratio

Lower of such ratios indicate the inability of the management in collecting the payments on time. Higher such ratios suggest a higher amount of working capital stuck in the receivables and as a result, an increase in interest costs.  They also impact the overall liquidity position of the corporation.

Too High Ratio

A too high ratio may suggest tight credit policy of the business. If the policy is keeping a lot of customers away from dealing with the corporation, the management should assess and compare their increase in interest cost versus the additional business that they can tap.

In pursuit of an ideal or benchmark ratio, an appropriate comparison of the ratio should be done with the industry peers. The practices differ widely from industry to industry.

Last updated on : November 6th, 2018
1. Ipadeola