![]() ![]() Thus, the turnover ratio can help check the quality of receivables to ensure companies can use them as collateral. Businesses often use accounts receivable as collateral.It provides insight into a company’s effectiveness in collecting receivables.The importance of the accounts receivables turnover formula is as follows: Uses of Accounts Receivables Turnover Formula In this case, the ratio of 2.94 is not bad. Assuming that it is a wholesale store, the company’s working capital requirements are low. Therefore, the company collected its receivables 2.94 times during the year. Step #2: Use the below formula to calculate the ratio.Īccounts Receivables Turnover Formula = Net Credit Sales / Average Accounts Receivable Step #1: Let us find the average account receivable using the given formula: Let us compute the ART ratio for the company. Suppose a wholesale Californian company that sells groceries has the following data in its latest annual report: Thus, if Harvey Foods, being a retail store, has a higher working capital requirement, it must improve its ART ratio. ![]() We can say that the ratio is not very high. This shows Harvey Foods’ turnover is 2, meaning the store collects its receivables twice a year (once every 180 days). Step #2: Now, calculate Harvey Foods’ accounts receivable turnover using the formula:Īccounts Receivables Turnover Formula = Net Credit Sales / Average accounts receivable
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