The receivable turnover ratio measures the number of times receivables are converted into cash in a given period. This is different from the average collection period which shows the number of days it takes to collect the receivables. This ratio is also known as Accounts receivable turnover ratio.
Ideally, credit sales should be used in the numerator and average receivables in the denominator. However, these figures are often not readily available in the financial statements.
The company can improve the turnover ratio by many methods. The most popular approach is offering a discount to the customers that pay their outstanding balance earlier, for example, within 30 days of the sales.
Formula for Receivable turnover ratio / Accounts receivable turnover
\[Receivable\,turnover\,ratio= \frac{{Sales}}{{Receivables}}\]
Example
Burger King has sales of Rs.2,10,000 and receivable in the amount of Rs.28,030. This gives a receivable turnover ratio of 7.49. The higher the receivable turnover ratio is, the better the company is at converting receivables into cash. A decline in the turnover ratio could mean either a decline in sales or an indication that the customers are taking a long time to pay for their purchases.
