# Debtor’s Turnover - Velocity Ratio

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## Definition: Debtor’s Turnover - Velocity Ratio

Debtor’s turnover ratio or accounts receivable turnover ratio or velocity ratio indicates the velocity of debt collection of a firm.

In simple words, it indicates the speed of collection of credit sales.

Formula:

Debtors Turnover Ratio = Net Credit Sales / Average Trade of Debtor

The main components of accounts receivable turnover ratio are average trade debtors and net credit annual sales.

The purpose of this ratio includes the amount of Trade Debtors & Bills Receivables.

Average Accounts Receivable is calculated as:

Accounts Receivable= Debtors +Bills Receivables

Average Accounts Receivable = (Opening bal. + Closing bal) / 2

The point which should be remembered while calculation of the Debtors Turnover Ratio is that provision for bad and doubtful debts should not be deducted since this may give an impression that some amount of receivables has been collected.

If the information about opening and closing balances of trade debtors and credit sales is not available, then the debtor’s turnover ratio can be calculated by dividing the total sales by the balance of debtors (inclusive of bills receivables) given.

Debtors turnover ratio=  Sales/ Average Receivables

Example:

If Credit sales= \$50,000; Return inwards= \$2,000; Debtors= \$4,000; Bills Receivables= \$2,000.

Calculation:

Debtors Turnover Ratio = Net Credit Sales / Average Trade Debtors

= (50000-2000)/(4000+2000)

=  48,000 / 6,000

=  8 Times

Significance of the Ratio:

Velocity Ratio or debtor’s turnover ratio indicates the number of times the debtors are turned over a year i.e. cash is collected by the debtors. The higher the value of debtor’s turnover the more efficient is the management of debtors or more liquid the debtors are. Similarly, low debtors turnover ratio implies inefficient management of debtors.

Hence, this concludes the definition of Debtor’s Turnover - Velocity Ratio along with its overview.

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