Receivables Turnover, also known as Average Collection Period, is the average number of days it takes for a business to collect payment from its customers. In other words, it measures how quickly a business converts its Accounts Receivable into Cash.
Cash is vital for the survival of any business so it is crucial that a business receives cash from its customers as quickly as possible to pay its bills. Receivables Turnover is a key metric to measure the short-term liquidity of a business.
Receivables Turnover = (Accounts Receivable / Sales) x Number of Days in the Year
Ideally, a business wants to have a Receivables Turnover of less than 60 days. This business has good liquidity. If it’s less than 60 days, then the business may have liquidity problems, which may affect its ability to pay its bills on time.