Working capital is the total amount of current assets minus the current liabilities. The working capital turnover ratio indicates a business effectiveness in utilizing its working capital. It helps in assessing if its credit policies are helping or hurting the business. While a high ratio may indicate the company operates on a cash basis or has quality customers that pay off their debts quickly, a low ratio can suggest a bad credit policy and poor collecting process. The ratio indicates the efficiency with which the business is able to collect credit it issues its customers. The average accounts receivable is calculated by adding the value of the accounts receivable at the beginning of the desired period to the value at the end and then dividing it by two.Īccounts Receivable Turnover = Net Credit Sales / Average Accounts Receivable It is calculated by dividing the net credit sales during a specific period by the average accounts receivables. It measures how many times a business can turn its accounts receivables into cash. The accounts receivables turnover ratio, also known as debtor’s ratio, is an activity ratio that measures the efficiency with which the business is utilizing its assets.
What Are the Different Activity Ratios? Accounts Receivable Turnover Ratio The activity ratios show the speed at which the assets are converted into sales.Īctivity ratios play an active role in evaluating the operating efficiency of the business as it not only shows how the company generates revenue but also how well the company is managing the components in its balance sheet. It indicates the investment in one particular group of assets and the revenue the assets are producing.Īssets such as raw materials and machinery are introduced to generate sales and thereby, profits. The activity ratios show the connection between sales and a given asset. If you need income tax advice please contact an accountant in your area. NOTE: FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks. What Are the Different Activity Ratios?.These ratios are also known as asset management ratios or performance/ efficiency ratios. The different types of activity ratios show the business’ ability to convert different accounts within the balance sheet such as capital and assets into cash or sale. Activity ratios measure the efficiency of a business in using and managing its resources to generate maximum possible revenue.
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