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Debtors or Receivables Turnover Ratio
It is otherwise called as Debtors Velocity. All the goods can not be sold on cash. There may be some credit sales. The credit sales is one of the sales promotion technique. The volume of credit sales is based on credit policy of the company. Each company has its own credit policy.
Formula to find Debtors or receivables turnover ratio
The following formula is used to calculate Debtors/Receivables Turnover Ratio.
Debtors/Receivables Turnover Ratio (or) Debtors Velocity = Net Credit Annual Sales / Average Trade Debtors
Net Credit Annual Sales = Gross Sales – Trade Discount – Cash Sales – Sales Returns
Trade Debtors = (Sundry Debtors + Bills Receivables) / Accounts Receivables
Average Trade Debtors = (Opening Trade Debtors + Closing Trade Debtors) / 2
While calculating debtors, the provision for bad and doubtful debts should not be deducted from them.
In the absence of opening and closing balances of trade debtors and credit sales, the debtors turnover ratio can be calculated by dividing the total sales by the balance of debtors (including bills receivable).
The formula is written as
Debtors Turnover Ratio = Total Sales / Debtors
Percentage of Net Sales to Receivables = (Net Sales x 100) / (Average Receivables or Average Trade Debtors)
Percentage of Receivables to Net Sales = (Average Receivables or Average Trade Debtors) / Net Sales x 100
Significance of Debtors Turnover Ratio / Debtors Velocity
This ratio indicates the degree of management of debtors or sales. The high debtors turnover ratio refers to effective management of sales or debtors and liquid of debtors and vice versa. There is no rule of thumb or standard ratio for Debtors Turnover Ratio.