What is the Debtors Turnover Ratio? (Receivables Turnover)

The ratio indicates the number of times, on average, a company collects its average trade receivables (debtors) during a year.

• A High Ratio is good. It means the company collects its cash quickly from customers, indicating strong cash flow and good credit policies.
• A Low Ratio is bad. It means cash is stuck with customers for too long, increasing the risk of bad debts (customers not paying).

Debtors Turnover Ratio = $\frac{\text{Net Credit Sales}}{\text{Average Trade Receivables}}$

• Net Credit Sales: Total Credit Sales minus Sales Returns. (Do not include Cash Sales).
• Average Trade Receivables: $\frac{(\text{Opening Debtors} + \text{Closing Debtors})}{2}$. (Trade receivables also include Bills Receivable).

Once you find the ratio, you can calculate the exact number of days it takes the company to collect cash. Average Collection Period = $\frac{365 \text{ days}}{\text{Debtors Turnover Ratio}}$

• For example, if the ratio is 6, the collection period is $365/6 = 60.8$ days. This means it takes the company about 61 days to get money from its buyers.