![]() Why are we talking only A/R and Inventories?īecause these two covers a major part of assets owned by a Company and require a large Cash investment. In simple terms, turnover means the total sales, or I can say the revenue a Company generates during a particular period.Īnd to find out the Company turnover ratio, we must find some figures on the basis of Account Receivable (A/R) and Inventories of a Company. The general rule is that the collection period should not greatly exceed the credit term period.In order to understand the term “Turnover Ratio”, it is necessary to know what turnover is. The average collection period measures the average number of days it takes to collect a credit sale equal to 365 divided by accounts receivable turnover.Īnalysis frequently uses the average collection period to assess the effectiveness of a company’s credit and collection policies. Average Collection PeriodĪdditionally, account receivable turnover can be converted into the number of days it takes to collect receivables by computing the average collection period is computed by dividing 365 (the number of days in a year) by the accounts receivable turnover formula as below:Īverage collection period = 365 ÷ Accounts receivable turnover $15,000 in accounts receivables at the end of the year.Īverage account receivable = (10,000 + 15,000) ÷ 2 = 12,500Īccount receivable turnover = 100,000 ÷ 12,500 = 8 times in a year.$10,000 in accounts receivables at the beginning of the year.Let’s say the Feriors company had the following financial results for last year: However, some companies may use total sales as the numerator rather than net credit sales. Only credit sales create credit, so cash sales are not counted. The reason for using net sales on credit rather than net sales is that cash sales do not generate credit. ![]()
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