Accounts Receivables Turnover

• The accounts receivable turnover ratio shows how long a company takes on average to receive cash on its customers' credit accounts. The formula to calculate accounts receivable turnover ratio is [Net Sales/Average Accounts Receivable]. To calculate the average accounts receivable amount, add the beginning and ending account receivable balances for the period, and divide the total by two [(Beginning Accounts Receivable + Ending Accounts Receivable)/2]. A high accounts receivable turnover number shows that the company turns its accounts receivables over quickly. A low number states that the company is not efficiently collecting money owed from its customers. Companies with low accounts receivable turnover numbers should improve icollection and credit policies.
  
  

Average Collection Period

• The average collection period shows the average length of days needed for your company to collect on credit sales. The formula to calculate the average collection period equals [Accounts Receivable/(Annual Credit Sales/365)]. An alternative formula is [365/Accounts Receivable Turnover]. A lower number is better than a higher number because it means the company takes fewer days to collect on its accounts receivable accounts. A company should compare the average collection period number to its credit policies. For example, if a company’s credit policies state invoices should be paid in 30 days and the average collection period is 55 days, the company needs to make changes to decrease the number. A company can offer discounts for early payment or tighten its credit policies.
  
  

Inventory Turnover

• The inventory turnover ratio indicates the length of time a company’s inventory is on-hand. The inventory turnover ratio is [Revenue/Inventory]. A more conservative alternative is [Cost of Goods Sold/Average Inventory]. A high inventory turnover means that a company is moving its inventory quickly and that inventory control and sales policies are efficient. A low inventory turnover ratio may mean that the company is overstocking inventory or experiencing a difficult time selling its finished goods. You can break down the inventory turnover ratio further by calculating the number of days it takes to move inventory, which is called the inventory period [Inventory Turnover/365]. A low inventory period is more favorable than a high one.
  
  

Total Asset Turnover

• The total asset turnover ratio shows how much revenue each dollar of an asset generates. The asset turnover formula equals [Revenue/Average Assets]. You calculate average assets by adding the balance for beginning assets and ending assets for the period and dividing the amount by two. A high total asset ratio is more favorable than a low number. Companies with low numbers are not efficiently using their assets to generate sales revenue. Comparing the ratio to the industry ratio gives companies a better perspective of how well or poorly they are performing.