Debtor Turnover Formula

Debtor Turnover Formula

Debtor turnover formula has been given below. Debtor turnover formula has been explained with an example

Debtor Turnover Formula =   Credit Sales                                                       Receivables

 

Debtor Turnover Formula Example

Credit Sales                             = 140,000

Receivables or average Sales = 30,000

Calculate Debtor Turnover?

Solution

Debtor Turnover Formula =          Credit Sales    

                                                      Receivables

= 140,000/30,000

= 4.667 Times

The above example shows that company has collected the payment from the customer 4.667 times.

High Debtor Turnover

High turnover is preferred by the company, because you are not offering free credit to the customer, rather you are financing your operation effectively.

 

Reasons for High Debtor Turnover Ratio

One of the main reasons for high debtor turnover ratio is tight credit policy. The second reason of high debtor turnover is sales growth or good performance of the marketing department. Company focuses on quality customer only, who pays in time. The reasons of high debtor can be listed as under

1.    Tight or conservative credit policy

2.    Company is focusing on cash sales

3.    Good performance of collection department

4.    Credit is offered to customer , who pays in time

Low Debtor Turnover

Low debtor turnover is not recommended or preferred by the companies, because fund are unnecessary blocked with customers. Low debtor turnover ratio shows that collection department is not performing up to the mark.

Reasons for Low Debtor Turnover

One of the reasons for low debtor turnover is easy credit policy. Other possible reason for the low debtor turnover the decline in sales growth. Low debtor turnover also results due to the poor performance of collection department.

1.    Easy or relaxed Credit policy

2.    Poor performance of collection department

3.    No control exists over customer selection. (Credit for all)

 Limitations of Debtor Turnover

Ideally customer turnover should be calculated on the bases of credit sale, but this figure is not found in financial statements. Therefore many companies use total sales figure for debtor turnover calculation, which is not a right approach.

Other limitation of Debtor turnover calculation is selection of debtor balance. There are two approaches i.e. closing debtor or average debtors. But both approaches do not give exact idea about different debtor level during the years.