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A financial indicator known as the receivables turnover ratio assesses a company's effectiveness in collecting unpaid customer invoices. The ratio specifically determines how many times a business may collect its typical accounts receivable total over the course of a certain period, often a year.
The formula for the receivables turnover ratio is as follows:
Receivables Turnover Ratio = Net Credit Sales / Average Accounts Receivable
The term "Net Credit Sales" refers to the overall amount of credit sales made during the time, and the term "Average Accounts Receivable" refers to the typical amount of money owed by clients to the business during the same period.
A firm's ability to collect its unpaid customer invoices is measured by its receivables turnover ratio, which can be high or low. A low ratio signals that the company may be having trouble collecting payments. A falling ratio over time may also be a sign of possible problems with credit policy, collection practices, or consumer creditworthiness.
Receivables turnover ratios can differ greatly by industry, and they are frequently combined with other financial ratios and metrics to evaluate a company's overall financial health.
