An Overview Of Receivable Turnover

An Overview of Receivable Turnover

The receivable turnover can be used as a measure of the efficiency of a company in collecting its receivables from the sales (Also see Overview of Income Summary Account) that it has made on credit. Collecting receivables is something every business should pay attention to, as this plays a role in ensuring healthy cash flow. Thus, undoubtedly, keeping good records of the sales that you have made on credit is a must. If you are a small business owner who is unable to afford the cost of hiring an in-house accountant, yet is too busy to handle the accounting tasks on your own, why not consider hiring an accounting firm in Johor Bahru? The experts will be able to help so that you can start organising your books including but not limited to preparing the trial balance, at the early stages before your records get too messy, which may bring severe consequences to your business.

The rate of receivable turnover of your company will be high if it has a low proportion of receivables from sales. Listed below are the factors that would affect the receivable turnover:

Accuracy in billings

If your staff send the invoices to the wrong company or have made some mistakes in the invoices, you will not be able to receive the payments on time.

Persistence in collecting payments

You will be able to reduce the sum of your receivable turnover if your staff would always contact the clients for payment.

Credit terms

If your company has a loose credit policy, which means that it offers credit to almost every client, then you will face a problem where some of the clients will delay the payments, or you may not receive their payments at all. On the contrary, if your company has a tight credit policy, you may have a higher rate of receivable turnover as you grant less credit to your clients.

To calculate the receivable turnover of your company (one of the critical financial ratio), you need to work out the net annual credit sales and the average accounts receivable of your company. Net annual credit sales refer to the net credit sales that you have made for the year. On the other hand, the average accounts receivable can be calculated by summing up the beginning and the ending accounts receivable and divide the resulting amount by two. Of course, the accuracy will depends on the accuracy of the double entry accounting as well.

If a business has higher receivable turnover, it shows that the company is capable of collecting its accounts receivable quickly. If its receivable turnover is low, then it is unable to do so. You, as a business owner, should trace your company’s receivable turnover metric by using a trend line. By doing so, you will be able to see progressive alterations in your turnover performance which you may be unable to see so clearly if you only calculate the data occasionally.

If you want to analyse the ability of your company in collecting accounts receivable, you should not only look at the calculation of receivable turnover. This is because this metric only shows the average of separate accounts receivable. Apart from the receivable turnover, you should also look into your company’s aged accounts receivable report so that you can have a clearer understanding of your collection status.

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