/ / Accounts receivable turnover ratio and types of settlements

Coefficient of turnover of accounts receivable and types of settlement

According to numerous sources, the concept ofaccounts receivable is characterized by the amount of debts that some economic entities are obliged to pay to other economic entities on the basis of their economic interactions. As a rule, these debts arise as a result of sales on credit.

In accounting under receivablesare understood property rights, as object of regulation of the civil legislation. The content of these rights is set forth in Art. 128 Civil Code, and includes: things, money, work and services, securities, information, intellectual property, other property and intangible goods. As a result of this interpretation, accounts receivable act as part of the enterprise's property, and the right to receive it, respectively, is a property right.

It should be noted that in economic practice, no business entity can do without it, because the creation of receivables is due to objective circumstances, namely:

  • for the debtor is access to additional free working capital;
  • for the creditor is an opportunity of active expansion of the market.

Formation of receivables is facilitated by a situation in which the moment of change of ownership rights does not coincide with the time of payment.

One of the main factors of the success of the enterpriseor the company is an increase in accounts receivable compared with the value of accounts payable. In its simplest form, receivables should be accepted in three forms:

  • Firstly, it acts as a way and a resource by which it is possible to pay off accounts payable;
  • Secondly, it represents a part of the products that have already been sold to consumers, but have not yet received payment for the shipped goods;
  • thirdly, it is part of the current assets, which are formed from the company's own sources of the enterprise or organization.

That is why, the most important indicator,characterizing the receivable, is the ratio of receivables turnover, referred to as "RT". In the simplest, most classical form, it is defined as a quotient from the division of the turnover of an enterprise into the average statistical value of a receivable. Calculated in this manner, the turnover ratio of receivables demonstrates the efficiency of the enterprise or company in demanding payment for products shipped to consumers. The decrease in the ratio indicates an increase in the number of insolvent customers, as well as the emergence of other problems with the sale of manufactured products. This is a very alarming signal for the enterprise, since the lower the turnover, the higher its requirements for working capital.

There are several ways in whichreflect the turnover ratio of receivables. For example, a method that expresses turnover as an average of the number of days needed to collect payments has been widely used, it is called the collection period for receivables (CP) and is calculated as follows:

CP = (RT / N) × 365,

where N is the sales volume, and 365 is the number of days in the year.

When using a different study period, the number 365, respectively, changes by the number of days of the study period.

In addition, the turnover ratioreceivables allows you to determine the trends in the changes in its values. For example, its increase at a constant turnover rate inevitably leads to an increase in the profitability of capital invested in production, and, conversely, vice versa.

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