How to Measure a Debtor's Turnover
The debtors' turnover ratio, also known as the debtors' "velocity," is a calculation commonly used by financial institutions to show the net purchases charged by debtors as a percentage of the average accounts receivable for the year. Typically, financial institutions perform this calculation for all debtors collectively. However, financial institutions can also apply this concept to an individual debtor.
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Instructions
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Determine the debtor's beginning balance at the start of the year. For example, assume the debtor owed $10,000 at the beginning of the year.
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Determine the debtor's ending balance at the end of the year. For example, assume the debtor owed $5,000 at the end of the year.
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Add the debtor's ending balance to the debtor's beginning balance and divide this sum by 2. Continuing the same example, ($10,000 + $5,000) / 2 = $15,000 / 2 = $7,500. This figure represents the average accounts receivable for the debtor during they year.
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Determine the debtor's net credit sales for the year. In other words, how much money did the debtor charge over the year. For example, assume the debtor's net credit sales for the year were $20,000.
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Divide the debtor's net credit sales by the debtor's average accounts receivable. Continuing the same example, $20,000 / $7,500 = 2.67. This figure represents the debtor's turnover for the year.
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