One of the concerns that many businesses face is how to increase revenue, especially receivables from customers. How can revenue be optimized? The following article lamchutaichinh.vn review about accounts receivable turnover of the business, how to calculate receivables turnover for you to better understand.

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## What is the Accounts Receivable Turnover?

Receivable turnover ratio (English name: Receivable turnover ratio) is a calculation in accounting, this rotation helps to check the efficiency of the company when it has to collect receivables including debts. of cutomer.

The accounts receivable ratio shows how efficiently a company is able to provide credit to its customers while also being able to collect short-term debts.

Receivables turnover ratio is also known as accounts receivable turnover ratio.

## Formula and Calculation of Accounts Receivable Turnover

You can better understand this index through the following formula and calculation:

### Formula

Receivables turnover ratio = Net credit sales/Average accounts receivable

### Instructions for Calculating the Amount of Spins Payable

To make it easier to understand, you can follow these steps:

Step 1: It is necessary to determine the net credit sales first. It is the sales for the year determined by credit/credit, as opposed to cash. This number is calculated using total sales, minus interest, other allowances.

Businesses can calculate net credit sales by balancing their accounts and reporting their income for the year.

Step 2: Determine the average of receivables, which is the amount that is related to the amount of money the customer owes you. From there to find the average receivable, it is necessary to take the number of accounts receivable at the beginning of the year and then add the values ​​of the business’s receipts at the end of the year divided by 2 to get the average receivables result.

Like net credit sales, the above figures can be found through the balance sheet, the income statement for the year.

Step 3: Divide net credit sales by average accounts receivable. Once you have the above 2 figures, you can easily calculate the number of turnovers easily. From there, the credit efficiency of the business can be seen because excluding cash, cash cannot create receivables.

### Accounts Receivable Turnover Example

For example:

After the end of the financial year, company A has a receivable of VND 120 million in its balance sheet. Total credit revenue for the financial year is 450 million VND and sales revenue is 170 million VND. In the balance sheet of company A last year, the value of receivables is 160 million dong.

We have:

– Net credit sales are: 450,000,000 – 170,000,000 = 280,000,000 VND

– Average receivables is: (120,000,000 + 160,000,000)/2 = 140,000,000 VND

>> Receivables turnover ratio of company A = 280,000,000/140,000,000 = 2

Thus, Company A must collect its revenues twice a year (180 days/time). In other words, the estimated time for company A to collect cash is 180 days in the case of credit sales.

## What is the Meaning and Role of Receivables Turnover?

In addition to calculating the rotation, need to understand more about its meaning, what is its role?

### High Factor

The key benefits of high receivables turnover are:

• The cash flow of the business increases when the customers pay the credit.
• Not too much bad debt.
• Free up your credit line for future transactions.

But if this index is too high, it also means that the credit policy of the business only cares about cash flow. Customers whose credit has been collected may be unhappy, upset, and the business will miss out on future customers.

At that time, businesses need to change policies, pay more attention to customer behavior and experience.

### Low Factor

This ratio is low, reflecting that the business cannot collect credit receivables from related transactions or debts. This negatively affects the business’ sales and capabilities:

• It is the way business credit is given that is not effective.
• Increasing bad debt situation as well as the ability to control cash flow is more difficult.
• Like a high receivables turnover ratio, it is difficult for customers to pay off credit. This makes it difficult for them to purchase or transact later.
• In addition, it is also related to many other problems, adversely affecting businesses. If this coefficient is extremely low, businesses need to change their policies and pay attention to customers in a realistic way, thereby increasing revenue for the business.

## How Much Receivables Turnover Is Reasonable?

Each industry has different regulations on the receivables turnover ratio, so it is impossible to determine the exact coefficient.

From there, the assessment of management effectiveness when collecting receivables and debts from customers must compare the average number of days of collection with the number of days of payment for receivables as prescribed by the enterprise.

Accounts turnover helps businesses measure a company’s efficiency when it comes to collecting fees. From that turnover ratio, businesses will have appropriate credit recovery policies to maintain the company’s business performance.

## Drawbacks of the Accounts Receivable Turnover Index

Although this coefficient helps you to detect activity trends, thereby devising a business strategy. But failed to detect or identify bad debt accounts or customers that needed specific review or overdue accounts and customers.

In addition, these revenues can change throughout the year, the calculation based on the start and end dates of the year will be difficult to be completely accurate. Finally, it is still advisable to compare this coefficient with other enterprises in the same industry with similar products with the same scale and similar business models.

## Conclusion

Hope through the above sharing about accounts receivable turnover of lamchutaichinh.vn you can get more useful information about the financial sector. From there run the business smoothly and successfully.

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