Debtors or Receivable Turnover Ratio

A business concern may sell goods on cash as well as on credit. Credit is one of the important elements of sales promotion. Following a liberal credit policy can increase the volume of sales. But the effect of a liberal credit policy may result in tying up substantial funds of a firm in the form of trade debtors. Trade debtors are expected to be converted into cash within a short period and are included in current assets. Thus, the liquidity position of a concern to pay its short-term obligations in time depends upon the quality of its trade debtors.

1. Debtors turnover ratio indicates the velocity of debt collection of firm. In other words, it indicates the number of times average debtors (Receivables) are turned over during a year.

                   Trade Debtors =    Sundry Debtors + Bills Receivables and Accounts Receivables

1. When the information about opening and closing balances of trade debtors and credit sales is not available, then  the debtors turnover ratio will be calculated as,

Generally, the higher the value of debtors turnover the more efficient is the management of debtors/sales or more liquid are the debtors. Similarly, low debtors turnover implies inefficient management of debtors/sales and less liquid debtors. But a very high debtors turnover ratio may imply a firms inability due to lack of resources to sell on credit thereby losing sales and profits. There is no rule of thumb for interpretation of the ratio. This ratio should be compared with ratios of other firms doing similar business and a trend may also be found to make a better interpretation of the ratio.

Debtors Turnover Ratio of Tata Steel for the years 2006-07 and 2005-06 is given below:

During the year 2006-07, the company's Debtors turnover ratio is increased, which indicates that the efficiency in the management of debtors is increased compared to the previous year.

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