# Receivable Turnover Ratio Calculator

The receivable turnover ratio calculator calculates accurately the ratio with the basic inputs like net credit sales, beginning and ending net receivables, and 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.

When a company engages in credit sales, the account receivables increase with sales and again reduce on clearing payment. This cycle continues several times 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 average, how many times such a 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 two 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 two variants of the formula for calculating the collection period:

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

## How to Calculate Using the Calculator?

For calculating the receivable turnover ratio and collection period, the user must accurately input the 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 the balance of the accounts receivables on the balance sheet.

No. of days in the period: Normally, it is 365 days barring some exceptions whose financial year is of, say, 18 months in place of the 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 will serve the purpose better. If for some reason, the receivable balance decreases sharply just before the closing of the year; as a result, it will hamper the whole calculation.

## About the Calculator / Features

The receivable turnover ratio calculator uses 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.

## 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

The lower of such ratios indicate the inability of the management to collect 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 a tight credit policy of the business. Suppose the policy keeps a lot of customers away from dealing with the corporation. In that case, 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 made with the industry peers. The practices differ widely from industry to industry.

## Example

Assume a corporation with the 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 1. 