First, for your listening pleasure

Now…about accounts receivables turnover. If you are a small business owner and turnover means nothing more to you than a yummy breakfast treat, you are not alone.

First a definition. The website Investopedia defines receivables turnover ratio as, “an accounting measure used to quantify a firm’s effectiveness in extending credit as well as collecting debts.”

The ratio is simple: take your net credit sales and divide them by your average accounts receivable. Generally, the higher the ratio, the better you are at collecting your credit sales. However, we have seen companies that have very high ratios with declining sales figures, because their credit practices for their industry are too strict, making them uncompetitive in their industry.

Remember, when you extend credit to a customer, you are essentially making a loan to them. It is important to know how much credit you have extended and it is very important that you review your outstanding receivables regularly. 

If you know your turnover ratio, you can make decisions on your practices – tighten/loosen your credit policies, employ outside collection help, or adopt point of sale cash collection.

Turn, turn, turn!