What is Trade Receivables Turnover Ratio & How to Calculate

4 min read | Updated on December 03, 2025, 17:59 IST

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When a company sells products or services on credit, that is, customers receive goods or services now, but pay later, the money owed to the company is called trade receivables.

A ‘trade receivables turnover ratio’ measures how many times a company collects its receivables during a period (it's usually a year). It shows how efficiently a company converts credit sales into cash.

A higher ratio means the company collects payments quickly. A lower ratio suggests money is stuck with customers for longer periods.

It’s like a speed indicator showing how fast money is coming back into the business after selling on credit.

The Formula

Trade receivables turnover ratio = Net credit sales / Average trade receivables

Where,

Net credit sales - Total sales made on credit (excluding cash sales) Average trade receivables - (Opening Receivables + Closing Receivables) / 2 If credit sales data isn't separately available, many analysts use total net sales as a proxy.

Example calculation,

Let's calculate for a fictional company, XYZ Traders:

Given data

Net credit sales for the year - ₹50,00,000
Trade receivables at year beginning - ₹8,00,000
Trade receivables at year end - ₹10,00,000

Now,

Calculate average trade receivables,

Average Receivables = (₹8,00,000 + ₹10,00,000) / 2 = ₹18,00,000 / 2 = ₹9,00,000

Apply the formula

Turnover ratio = ₹50,00,000 / ₹9,00,000 = 5.56 times

This means XYZ Traders collected its average receivables 5.56 times during the year, or roughly once every 65 days.

Converting to collection period

To make the ratio more intuitive, convert it to average collection period - Average collection period (in days) = 365 / Receivables turnover ratio

Using our example -Collection period = 365 / 5.56 = 66 days

This means on average, XYZ Traders takes 66 days to collect payment after making a credit sale.

What Does the Ratio Tell You?

High ratio (10+ times) – It shows the company collects payments quickly, has good credit control, cash flow is good and there is minimal risk of bad debts
Medium ratio (4-8 times) - It indicates that collection efficiency is moderate and credit terms are standard.
Low ratio (below 3 times) – This indicates that money is usually stuck for more than 180 days with the customers, which can create cash flow problems. There is also a possibility of debts turning bad.

Industry variations

As different industries have different production life cycles their turnover ratios differ too.

High turnover industries (15-30 times) - Fast-moving consumer goods (FMCG), Supermarkets, Online retail
Medium turnover industries (6-12 times) – Manufacturing, Wholesale trade, Consumer durables
Low turnover industries (3-6 times) - Heavy machinery, Construction, B2B services

A turnover of 5 times might be excellent for construction but poor for FMCG. Hence, it is advisable to always compare within the same industry.

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Why this Ratio Matters

As the trade receivable turnover ratio indicates over health of the company, it's important to all stakeholders, like

For investors

Shows if a company's sales are quality sales (getting paid) or just paper profits.

For management

Identifies collection problems early and helps set better credit policies.

For lenders

Banks check this ratio before giving loans. High turnover means lower risk.

For suppliers

Understanding this helps suppliers decide whether to extend credit to the company.

Limitations to Consider

There are a few situations where this ratio has to be combined with other parameters to arrive at a logical conclusion, like

Seasonal businesses

A retailer might have different turnover ratios across different months. Annual figures might not show the realistic picture.

Year-end window dressing

Companies might push collections just before year-end to improve the ratio artificially.

Industry differences

Never compare across industries without context.

The trade receivables turnover ratio is an important indicator of how well a company manages its credit sales and collections. It reveals whether impressive sales numbers translate into actual cash or just remain as promises to pay.

A healthy ratio means the company isn't just making sales but also collecting money efficiently, which translates to a good cash flow. This is critical because at times, a business can be profitable just on paper but fail if cash doesn't come in.

For investors and business owners alike, tracking this ratio provides early warning signs of collection problems. It helps identify well-managed businesses that convert sales into cash quickly.

About Author

Pradnya Surana

Sub-Editor

is an engineering and management graduate with 12 years of experience in India’s leading banks. With a natural flair for writing and a passion for all things finance, she reinvented herself as a financial writer. Her work reflects her ability to view the industry from both sides of the table, the financial service provider and the consumer. Experience in fast paced consumer facing roles adds depth, clarity and relevance to her writing.