Definition: The Debtors Turnover Ratio also called as Receivables Turnover Ratio shows how quickly the credit sales are converted into the cash. This ratio measures the efficiency of a firm in managing and collecting the credit issued to the customers.
One important thing that needs to be taken care of is, generally the companies use total sales in the place of net sales, which gives an inflated turnover ratio. Thus, while calculating this ratio, only the net credit sales is to be taken into consideration.
Ideally, a company compares its debtors turnover ratio with the companies that have similar business operations and revenue and lie within the same industry The formula to compute Debtors Turnover Ratio is:
Debtors Turnover Ratio = Net Credit Sales/Average Account Receivable.
Where, Average Account Receivable includes trade debtors and bill receivables.
Higher the Debtors turnover ratio, better is the credit management of the firm.
Example: Suppose a firm has total sales of Rs 5,00,00 out of which the credit sales are Rs 2,50,000. The opening balance of account receivables is Rs 2,00,000 and the closing balance at the end of financial year is Rs 1,00,000. The debtors turnover ratio will be:
Debtors Turnover Ratio = 2,50,000/1,50,000 = 1.67 times
Credit sales = 2,50,000
Average Account Receivables = (2,00,000+1,00,000) /2 = 1,50,000