More of this Feature • Part 1: Lesson 3 Main • Part 2: How to Get Statements • Part 3: What's a Balance Sheet • Part 4: Typical Balance Sheet • Part 5: Current Assets • Part 6: Receivables • Part 7: Receivable Turns • Part 8: Inventory • Part 9: Inventory Turns • Part 10: Inventory Example • Part 11: Prepaid Expenses • Part 12: Current Liabilities • Part 13: Working Capital • Part 14: WC Per Dollar of Sales • Part 15: Negative Work. Cap • Part 16: Current Ratio • Part 17: Quick Ratio • Part 18: Long Term Investment • Part 19: Property, Plant, Equip. • Part 20: Intangible Assets • Part 21: Goodwill • Part 22: Deferred Charges • Part 23: Debt, Debt to Equity • Part 24: Other Liabilities • Part 25: Minority Interest • Part 26: Shareholder Equity • Part 27: Book Value • Part 28: Com. & Pref. Shares • Part 29: Cap. Surplus, Reserve • Part 30: Treasury Stock • Part 31: Retained Earnings • Part 32: Formula & Calculations • Part 33: Putting it all Together • Part 34: Segment 2

Related Resources • Investing Lesson 1 • Investing Lesson 2 • Investing Lesson 3 • More Investing Lessons

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Receivable Turns

Common sense tells you the faster a company collects its receivables, the better.  The sooner customers pay their bills, the sooner a company can put the cash in the bank, pay down debt, or start making new products.  There is also a smaller chance of losing money to delinquent accounts.  Fortunately, there is a way to calculate the number of days it takes for a business to collect its receivables.  The formula looks like this:

Credit Sales (found on the income statement - not the balance sheet)
-------------------------(divided by)---------------------------
Average Receivables

Let's look at an example.

H.F. Beverages* is a major manufacturer of soft drinks and juice beverages.  It sells to supermarkets and convenience stores across the country on a 30 day term.  To see if customers are paying on time, we need to look for the income statement.  It is normally found within a page or two of the balance sheet in the annual report or 10K.  With the income statement in front of you, look for an item called "Credit Sales" (if you can't find it, there is an item called "Total Sales" which is acceptable but not as accurate).

In 2000, H.F. Beverages reported credit sales of $15,608,300.  If we look at the excerpt from its balance sheet (above), we will see that in 2000,  it had $1,183,363 in receivables and in 1999, $1,178,423.  We need to find out the average amount of receivables H.F. had in 2000, so we would take $1,1873,363 + $1,178,423 and divide it by 2.  The answer is $1,180,893.

Plug the two numbers into the formula.

Credit Sales = $15,608,300
------------(divided by)--------------
Average Receivables = $1,180,893

The answer, called "Receivable Turns" by financial analysts, is 13.2173.  This means that H.F. Beverages collects its accounts receivable 13.2173 times per year.  Once you calculate this number, finding out the number of days it takes for customers to pay their bills is simple.  Since there are 365 days in a year and the company gets 13.2173 turns per year, take 365 ÷ 13.2173.  The answer is the number of days it takes the average customer to pay (in H.F.'s case, we come up with 27.61).

This means the company is doing a good job managing its accounts receivable because customers aren't exceeding the 30 day policy.  Had the answer been greater than 30, you would have been wise to try to find out why there were so many late payments, which could be a sign of trouble.  (Keep in mind you will need to read through the company's reports to find out what its collection deadline is.  Not all companies require their customers to pay within 30 days).

*A Fictional Company for illustration only

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