iX ERP accounts receivable turnover is an accounting measure used to quantify a company’s effectiveness in collecting its receivables or money owed by clients. The value shows how well a company uses and manages the credit it extends to customers, and how quickly that short-term debt is collected or is paid. The receivables turnover value / ratio is also called the accounts receivable turnover value / ratio.
Key Takeaways
- The accounts receivable turnover ratio is an accounting measure used to quantify a company’s effectiveness in collecting its receivables or money owed by clients.
- A high receivables turnover ratio can indicate that a company’s collection of accounts receivable is efficient and that the company has a high proportion of quality customers that pay their debts quickly.
- A low receivables turnover ratio might be due to a company having a poor collection process, bad credit policies, or customers that are not financially viable or creditworthy.
- A company’s receivables turnover ratio should be monitored and tracked to determine if a trend or pattern is developing over time.
High Accounts Receivable
A high receivables turnover ratio can indicate that a company’s collection of accounts receivable is efficient and that the company has a high proportion of quality customers that pay their debts quickly. A high receivables turnover ratio might also indicate that a company operates on a cash basis.
A high ratio can also suggest that a company is conservative when it comes to extending credit to its customers. Conservative credit policy can be beneficial since it could help the company avoid extending credit to customers who may not be able to pay on time.
On the other hand, if a company’s credit policy is too conservative, it might drive away potential customers to the competition who will extend them credit. If a company is losing clients or suffering slow growth, they might be better off loosening their credit policy to improve sales, even though it might lead to a lower accounts receivable turnover ratio.
Low Accounts Receivable
A low receivables turnover ratio might be due to a company having a poor collection process, bad credit policies, or customers that are not financially viable or creditworthy.
Typically, a low turnover ratio implies that the company should reassess its credit policies to ensure the timely collection of its receivables. However, if a company with a low ratio improves its collection process, it might lead to an influx of cash from collecting on old credit or receivables.
Tracking Receivables Turnover Ratio
A company’s receivables turnover ratio should be monitored and tracked to determine if a trend or pattern is developing over time. Also, companies can track and correlate the collection of receivables to earnings to measure the impact the company’s credit practices have on profitability.
For investors, it’s important to compare the accounts receivable turnover of multiple companies within the same industry to get a sense of what’s the normal or average turnover ratio for that sector. If one company has a much higher receivables turnover ratio than the other, it may prove to be a safer investment.
iX ERP Dashboard provide automatically calculated Receivables Turnover Value and Ration from the ERP data Entry, for financial analysts and owner to understand more about their companies and take decisions based on accurate data not guesses, which is the feature of successful data driven organisations.