Degree of realization risk in accounts receivable. The lower the turnover rate, the longer receivables are being held-and the less likely they are to be collected. Also, there is an Opportunity Cost of tying up funds in receivables for a longer period of time. The accounts receivable turnover equals:
Assume annual credit sales are $100,000, beginning-of-year accounts receivable are $30,000, and end-of-year accounts receivable are $20,000. The turnover is:
If sales vary greatly during the year, this ratio can become distorted unless proper averaging takes place. In such a case, quarterly or monthly sales figures should be used.
