What will be the trade receivables turnover ratio
The Trade Receivables Turnover Ratio (also called Debtors Turnover Ratio) measures how efficiently a business collects cash from its credit customers. It shows how many times, on average, trade receivables are converted into cash during a period.
???? Formula:
Receivables Turnover Ratio=Net Credit SalesAverage Trade Receivables\text{Receivables Turnover Ratio} = \frac{\text{Net Credit Sales}}{\text{Average Trade Receivables}}Receivables Turnover Ratio=Average Trade ReceivablesNet Credit Sales?
???? Where:
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Net Credit Sales = Total Sales – Cash Sales (only credit sales are considered).
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Average Trade Receivables = Opening Debtors + Closing Debtors2\frac{\text{Opening Debtors + Closing Debtors}}{2}2Opening Debtors + Closing Debtors?
If bills receivable are included:
Average Trade Receivables=Opening Debtors + Closing Debtors + Bills Receivable2\text{Average Trade Receivables} = \frac{\text{Opening Debtors + Closing Debtors + Bills Receivable}}{2}Average Trade Receivables=2Opening Debtors + Closing Debtors + Bills Receivable?
???? Example:
Let’s say for the year:
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Net Credit Sales = ?10,00,000
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Opening Debtors = ?1,00,000
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Closing Debtors = ?1,50,000
Then:
Average Receivables=1,00,000+1,50,0002=?1,25,000\text{Average Receivables} = \frac{1,00,000 + 1,50,000}{2} = ?1,25,000Average Receivables=21,00,000+1,50,000?=?1,25,000 Receivables Turnover Ratio=10,00,0001,25,000=8 times\text{Receivables Turnover Ratio} = \frac{10,00,000}{1,25,000} = 8 \text{ times}Receivables Turnover Ratio=1,25,00010,00,000?=8 times
???? Interpretation:
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A higher ratio means faster collection (good liquidity).
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A lower ratio may indicate issues with credit policy or debt collection.
