In specific situations, the receivables turnover ratio could be perceived as a liquidity ratio. For example, there are companies that manage to collect credit sales in roughly 90 days, while others do that in up to 6 months. So, what is the goal of this specific ratio? In simple terms, it has to outline how effective a company is at collecting credit sales from clients. That’s because it managed to collect twice the approximate number of average receivables. Let’s look at an example, shall we? Considering that a firm had $20,000 of average receivables during a specific year and collected the sum of $40,000 of receivables during that timeframe, then the company would have accomplished to turn its accounts receivables twice. That is to say, this ratio calculates how many times a firm is likely to collect its average accounts receivable over a given year.Ī turn means every time a company collects its rough receivables. Thus, its main purpose is to assess the number of times a firm can turn its accounts receivables into cash over a specific timeframe. To start with, the accounts receivable turnover represents an efficiency ratio.
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