How to Calculate a Debtor's Turnover Ratio

Calculating debtor's turnover ratio

Debtor's turnover ratio shows how long people normally take to pay a firm for purchases on average. This ratio is beneficial when more than one period is calculated. The length of a period depends on the period a user chooses. Usually the period is one year. By comparing two periods, management can tell if they are collecting their receivables quicker or longer on average. An investor may want to compare debtor's turnover ratio to the actual credit policies a firm has when selling items on credits. If a firm's debtor's turnover ratio is higher than the amount the firm normally gives people to repay their credit, then the firm is doing a poor job of collecting receivables.

Instructions

1. Determine the average debtors. The average debtors is the beginning amount people owe the company for sales, plus the ending amount people owe the company for sales divided by two. For example, a firm has beginning accounts receivable of $100,000 and ending accounts receivable of $150,000. The average debtors equals $125,000.

2. Determine net credit sales. For example, a firm has $400,000 of credit sales.

3. Divide net credit sales by average debtors to arrive at debtor's turnover ratio. In the example, $400,000 divided by $125,000 equals an approximate debtor's turnover ratio of 3.2 times. This number represents the number of times money owed to a firm on credit is fully collected throughout a year. The higher ratio, the more efficient a firm is on collecting their receivables.

References

• Universal Teacher 4 U: Ratio Analysis
• Accounting For Management: Debtors/Accounts Receivable Turnover Ratio