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What is Debtors Turnover Ratio? What propositions should be kept in mind while working with them?
Debtors Turnover Ratio indicates the number of times average debtors are turned over during a year. This ratio is also known as accounts receivable turnover ratio. Following propositions should be kept in mind while working with them:
- Only credit sales should be considered. In practical situation, where break up of credit and cash sales may not be possible then the total sales may be considered for the computation of this ratio.
- Bill receivables should be considered along with the debtors.
- Debtors not arising out of the regular sales transactions should be excluded as far as possible.
- In some cases, average sundry debtors instead of only closing sundry debtors may be considered.
- For the calculation of daily sales, it is customary to consider 360 days in a year instead of 365 days in a year.
What does Debtors Turnover Ratio indicate?
Debtors Turnover Ratio indicates the speed at which the sundry debtors are converted in the form of cash. It indicates the number of times the debtors are turned over a year. It is the reliable measure of receivables from credit sales. The higher the value the more efficient is the management of debtors. Similarly, lower the ratio means inefficient management of debtors.
Formula to calculate debtors turnover ratio = Net credit sales/ Closing sundry debtor
This ratio is supported by the calculation of average collection period:
Calculation of daily sales = Net credit sales/ No. of working days
Calculation of average collection period = Closing sundry debtors / Daily Sales
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