Accounts receivable turnover ratio and types of settlement

According to numerous sources, the concept of receivables 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, accounts receivable are defined as property rights, as an object of regulation of 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, receivables 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 conditioned by 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 accounts receivable is facilitated by the situation when the moment of change of ownership rights does not coincide with the time of payment.

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

• First, it acts as a way and a resource by means of which it is possible to pay off accounts payable;
• Secondly, it is a part of the products that have already been sold to consumers, but have not yet received payment for the shipped goods;
• Third, 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 accounts receivable is the debt receivable turnover ratio, denoted as "RT". In the most simple, classical form it is defined as a quotient from the division of the enterprise turnover index into the average statistical value of the receivables. 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 which the ratio of receivables turnover can be reflected. 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 ratio of accounts receivable allows you to determine the trends of changes in its values. So, for example, its increase at a constant turnover speed inevitably leads to an increase in the profitability of capital invested in production, and, conversely, vice versa.