This indicator can accurately measure the speed at which a company's debt is repaid. The fact is that companies that sell goods and provide services to the public may not receive money for their activities immediately. Some customers delay payments, which must be taken into account. And with the help of turnover, you can determine the average time period during which finances from the consumer are transferred to the account.
This indicator can accurately measure the speed at which a company's debt is repaid.
The turnover ratio shows how many times during the year the organization received payments, the amount of which is equal to the outstanding debt. It clearly shows whether the company is effectively working with customers and reflects the company’s credit policy.
Why is the accounts receivable turnover ratio calculated?
The accounts receivable turnover ratio is used to conduct a financial analysis of the company's sustainability in a competitive market environment. The calculated accounts receivable turnover ratio will show how effectively the company collects debts for goods supplied.
A decrease in the coefficient may indicate that:
- The company increased the share of insolvent customers.
- The company decided to pursue a more lenient policy with customers in order to gain a larger market share by providing longer payment deferrals to its customers. Accordingly, the lower the specified ratio, the higher the company's need for working capital, which is necessary to increase sales volumes.
To calculate the accounts receivable turnover ratio, a simple formula can be used that looks like this:
Kob - debtor debt turnover ratio;
Op - sales volume at the end of the year (revenue from sales);
DZsg - average annual debt of debtors.
To determine the average annual DZ, the following formula is used:
DZsg = (DZng + DZkg) / 2,
DZng - debt as of the beginning of the year;
DZkg - debt as of the end of the year.
You can learn about the procedure for keeping records of receivables from our article “Keeping records of receivables and payables.”
Activity ratios
allow you to evaluate the efficiency of using enterprise funds.
The inventory turnover period
{Stock turnover)
reflects the speed of inventory sales in days:
Inventory turnover = (inventory/Production costs) ? 365.
It is calculated as the average annual value of the amount of inventory divided by the value of daily production costs. The latter is determined as the result of dividing the sum of direct production costs for the current year by 365 days. In general, the higher the inventory turnover ratio, the less funds are tied up in this least liquid asset group. It is especially important to increase turnover and reduce inventories if there is significant debt in the company’s liabilities.
In some cases, when the coefficient is tied to revenue, the inventory turnover period is calculated as the average annual value of the amount of inventory divided by the enterprise's revenue for the analyzed period, multiplied by 365 days.
In the case of calculating this and other similar indicators for a period of less than one year, the following technique is applied. The total values used in the formula for the calculation period (month, quarter or half-year) are multiplied by a coefficient of 12, 4 or 2, respectively. Average annual values are replaced with averages for the calculation period.
The receivables turnover period
(Average collection period)
shows the average number of days required to collect the debt:
Accounts receivable turnover = (Accounts receivable/Revenue) x 365. It is calculated as the ratio of the average annual amount of accounts receivable to the amount of daily revenue. Daily revenue is determined as the result of dividing the amount of revenue from sales of products received during the year by 365 days. A high ratio may indicate difficulties encountered in collecting funds from accounts receivable.
The accounts payable turnover period
(creditor/Purchases ratio)
indicates the average number of days it takes a company to pay its bills:
Accounts receivable turnover = (Accounts payable/Amount of daily purchases) ? 365.
It is calculated as the ratio of average annual accounts payable to the amount of daily purchases. The latter is determined as the result of dividing direct production costs (costs of raw materials, materials and components, excluding piecework wages) incurred during the year by 365 days. Ideally, a company would like to collect debts from accounts receivable before it becomes necessary to pay debts to creditors.
Table of contents
The receivables turnover period is defined as the ratio of receivables to revenue
By calculating how quickly receivables will be repaid in days, you can determine the average period required for the company to collect debts from buyers. To calculate it, the receivables turnover formula is used, which looks like this:
Psb = DZsg / Op × Dn,
PSB - debt collection period;
Days—number of days in the billing period. If the calculation is made for a year, then Day will be equal to 365.
As a result, the receivables turnover period is determined as the ratio of the amount of average annual “receivables” to the volume of revenue. If the repayment period of receivables needs to be calculated in daily terms, then their number in the calculation period is added to the denominator.
Receivables maturity date
Return to methods of analysis of financial statementsWhen analyzing financial statements, to assess financial stability in the short term, an indicator such as the maturity of receivables is used.
Definition. Receivables repayment period - (Accounts receivable * Duration of one period) / Average annual sales on credit;
The receivables maturity period is the average period of time during which a company, having sold its products, expects the receipt of money. Determines the average receivables turnover time in days, taking into account changes in sales revenue.
Icon in formulas (acronym):
DSO
Synonyms: Receivables turnover period, receivables turnover in days, average payment receipt period, average collection period, Days sales outstanding, RTD, Receivable Turnover in Days, receivables turnover period.
Formula for calculating the maturity of receivables:
, Where
DSO - receivables repayment period, days; DAP—duration of one period, days; AR — accounts receivable (Account receivable), rubles; NS — revenue (net) from all types of sales (Net Sales, Average annual sales on credit), rubles;
Purpose. If the average actual maturity of accounts receivable exceeds the established one, this may also affect the degree of liquidity of the company.
The most important element of the analysis of accounts receivable is the assessment of its turnover. The trend in this indicator is often used to determine the validity of a discount for early payments. The higher the turnover rate, the less money is invested in accounts receivable. The number of receivables turnover is calculated using the formula:
DSOob = NS / AR;
Recommended values. Depends on the industry. According to Western sources, for an average company the value of this indicator is 45 days (or 8 revolutions per year).
Example: The duration of one period is 365 days. Accounts receivable were 58.21 million rubles at the beginning of the year, and at the end 69.21 million rubles. Revenue (net) from all types of sales is 395.12 and 428.47 million rubles, respectively. Determine the change in the receivables maturity ratio for the year.
The value of the receivables maturity ratio at the beginning of the year: DSOstart = 365 * (58.21 / 395.12) = 53.8 days.
The value of the receivables maturity ratio at the end of the year: DSOcon = 365 * (69.21 / 428.47) = 58.96 days.
Change in value: DSO = DSOend / DSOstart = 1.0959 or increased by +9.59%.
Answer. The receivables maturity ratio increased over the year by 9.59%.
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How to determine the turnover period of accounts receivable without errors?
In order to calculate accounts receivable turnover with the smallest error, you should:
- abandon the practice of using the value of revenue cleared of indirect taxes (excise taxes, VAT), since receivables, as a rule, contain these indirect taxes;
- Please note that sales revenue is calculated when products are shipped, while payment for them is made later.
For more information about how sales revenue is reflected in accounting, see our article “How is revenue reflected in the balance sheet?”
Receivable turnover
Koa = Net revenue from sales of products / Average annual value of assets; According to the balance: Koa = f.2 row.035/f.1((row.280gr.3+ row.280gr4)/2) ; (For Ukrainian enterprises) Koa=f.2 row.030/f.1((row.280gr.3+ row.280gr4)/2) ; (For small businesses in Ukraine) Koa=f.2row.010/f.1((row.300gr.3+ row.300gr4)/2) ; (For Russian enterprises) Working capital turnover ratio The working capital turnover ratio characterizes the ratio of revenue (gross income) from product sales, excluding value added tax and excise duty, to the amount of the enterprise's working capital. A decrease in this ratio indicates a slowdown in the turnover of working capital.
Results
Without calculating accounts receivable turnover, the company will not be able to build its own credit policy for working with customers. The decision to grant a deferred payment and its duration should be made taking into account all information about the financial condition of the company and its strategic plans.
Having analyzed its own resources/capabilities and compared them with its goals, the company determines the maximum and minimum limits of possible deferment of payment by customers. This value will subsequently be used when concluding transactions with them. This can significantly reduce the repayment period of accounts receivable.
The stability of the enterprise is determined by financial indicators. One of the key indicators of the commercial health of an organization is the accounts receivable turnover (AR), or more precisely, its ratio. The PP itself arises as a result of agreements concluded between consumers and parties offering goods or services. Based on the turnover rate of this asset, one can judge the success and efficiency of the enterprise’s business activities.
Basic definitions
In world practice, the receivables turnover ratio is commonly called ReceivablesTurnover (RT). It refers to the main indicators of business activity and risk identification. There is a certain difference between the accounts receivable turnover itself and its ratios, so they should not be confused with each other.
Accounts receivable
Using accounts receivable turnover, you can see the speed of debt payment, and also calculate how long it will take until the money is fully refunded for goods sold or services provided. But the turnover ratio is needed in order to determine the effectiveness of relationships with customers and calculate the amount of payments made by them for a certain period of time (year, month).
Turnover is directly related to the solvency of the company, as well as to the technical potential of the enterprise. But for a complete picture of the state of the company, it is necessary to calculate the turnover of fixed assets.
Working capital includes:
- money directly;
- short-term accounts receivable;
- production inventories;
- various types of short-term investments.
Determining this indicator will help you learn about the efficiency of using the company's funds at any time. It is calculated by dividing the amount of proceeds by the amount of fixed assets. Accounts receivable is a certain amount that one business, firm or individual owes to another company. Debt arises when goods or services were provided but no money was paid for them. Accounting equates them to current assets.
The concept of accounts receivable turnover
Debt refers to monetary obligations that someone has to businesses and individuals. For example, this is a payment that has not yet been received by the company. This is an indirect loss in the income of the enterprise, which may or may not be compensated if for some reason the debtor of the organization is unable to fulfill its financial obligations.
There can be two varieties:
- Normal. The one that was repaid in due time.
- Overdue. Debt that is not paid within the specified time.
Debt turnover is a coefficient that characterizes the effectiveness of a company’s cooperation with its counterparties. It shows how quickly raw materials are transformed into money, and becomes a real part of capital.
The concept of the period of ODZ
The turnover period of accounts receivable can also be called the time of its return. It shows the average payment delay time. LAP is determined by how intensively the assets or liabilities are used.
Debt turnover indicators can demonstrate how the company's economic performance has changed. This is possible if you use the following methods:
- increase revenue after selling products;
- reduce the performance indicators for the selected period.
To do this, you can provide a loan to another company in the early stages, having carried out its verification. At the same time, credit policy that affects debt debt is:
- Conservative. Control is carried out as strictly as possible, and all borrowers undergo strict verification.
- Moderate. The company's risk is average.
- Aggressive. There are minimal conditions and no checks, so the risk of not getting your money is huge.
As a result, the PPV can be high, medium and low.
Accounts receivable turnover
Inventory turnover ratio Inventory turnover ratio - reflects the number of turnovers of the enterprise's inventory for the analyzed period. A decrease in this indicator indicates a relative increase in inventories and work in progress or a decrease in demand for finished products. In general, the higher the inventory turnover rate, the less funds are tied up in this least liquid item of current assets, the more liquid the structure of current assets and the more stable the financial position of the enterprise.
How to calculate the turnover period
In simple terms, POPL is the term for repaying the debt. With its help you can find out the average payment deferment time. That is, the receivables turnover period is determined by the ratio between the number of days when the debt was not repaid in the estimated time and the value of the receivables.
To accurately calculate the period under consideration:
- DPR = duration of period/DPR
For clarity, each value must be further analyzed. For example, receivables are accounts receivable. Its turnover is the speed of debt repayment. It is equal to the ratio of sales revenue to the average volume of proceeds for the period that is being analyzed.
- Receivables turnover in days = Revenue/((Results at the beginning - Receivables at the end)/2)
This formula allows you to determine how many times and in what volume the company received revenue for services provided. Estimated time may vary. For example, from a month to a quarter or a year. Balance sheets can be used as a source of information. You can also use the profit and loss statement that the company had.
True, there are nuances depending on the country where this practice is used. For example, in Western countries there is a different technology for determining the period under consideration. In particular:
- apply the amount of debt that was formed at the end of the period under study;
- Doubtful debts are calculated from the total value in order to obtain more objective results.
The result is the following formula:
- ODZ = (DZ - questionable DS)/B*365 days
In domestic practice, such a formula is rarely used.
Analyzing the indicator
The next important step that must be taken after the average receivables turnover period has been determined is to analyze them correctly. For analysis, average indicators are used with which the results are compared.
The following factors may affect the PAP:
- what kind of remote control was at the beginning of the analyzed time;
- how much finance was received;
- accrued profit for the specified time;
- number of days in the reporting period.
You need to find out your actual and planned income. These indicators demonstrate how effective management's policies are.
It is interesting that the planned income may differ from the established standard:
- deviation of actual from planned;
- difference between planned and normative.
This calculation will allow you to avoid errors in the preparation of documentation.
What if the rate goes down?
If the receivables turnover time is falling, this is a good sign. If the duration of debt turnover increases, this is a good sign that the company has conscientious debtors who fulfill their obligations according to the terms of the contract. In addition, he indicates that the head of the company chose the right path, competently implemented the credit policy and has an established collection system. But at the same time, it is important not to put too much pressure on counterparties, otherwise they will refuse to cooperate with an overly demanding partner. Demand for their products will fall, which means there will be fewer avenues for distribution. It is important to properly maintain a balance.
What if the rate increases
If the duration of debt turnover increases, this is a sign that the company has unscrupulous debtors who fail to fulfill their obligations according to the terms of the contract. Typically, this result is observed if the amount of receivables accumulates critically. That is, the company's bills are not paid on time.
This often means that the company's products are not in great demand on the market or their quality is not high enough to compete with other companies. Also, such an indicator may indicate an ineffective management apparatus that cannot adequately build relationships with debtors. For example, too much loyalty.
But a decline can mean more than just bad things. Often receivables fall if the company expands its sales market or expands itself. This can be corrected by increasing working capital.
A properly conducted analysis will provide comprehensive information about how well or poorly the company is doing. If overdue debts continue to accumulate, it is advisable to write them off. Thus, the company's balance sheet will be aligned. But in order to do this on time, you need to regularly analyze and make adjustments if alarming factors appear.
Sep 10, 2019adminlawsexp
