![]() This ratio is specified in terms of times.ĭebtors Turnover ratio formula = Net credit sales / Avg ARĬredit sales are the total amount of goods or services sold or supplied on credit by a business to its consumers. The turnover ratio of debtors is computed as the ratio of net credit sales to the average trade debtors. The Formula for Calculating Debtors’ Turnover Ratio It can determine whether a company is experiencing difficulties collecting on credit sales. ![]() It is an important indicator of a firm’s financial and operational integrity. ![]() In other terms, it measures how quickly debtors are paid off. It establishes the rationality of the company’s debtors’ resources and the efficiency with which the company converts debtors to cash. It measures how effectively a company’s management controls its receivables. The Debtors’ turnover ratio provides insight into a business’s collection and credit strategies. Therefore, the rate at which receivables are recovered directly affects the business’s liquidity condition. Later on, these receivables are converted to cash. In business, the debtor turnover ratio is also called Receivables’ Turnover Ratio.ĭue to the delay in revenue realisation, receivables are formed when a business offers products on credit. What Does The Debtor Turnover Ratio Mean? So, what is the effectiveness and quality of a company’s credit collection operations? To address this question, a company’s Debtors turnover ratio is examined. If this is not done, debt becoming unaffordable will increase. But collecting book debts quickly and within the credit period is vital. No business can afford to conduct all transactions in cash thus, making credit available to clients is a requirement.
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