Question

higher receivable turnover than payable turnover what does this say about a company

Answer 1

ANSWER-

STEP-1 (MEANING OF COMPANY)

A COMPANY is an organisation,which has a main aim of earn profit by serving good quality of goods and services to the customers.Company has to keep constant eye on business surroundings or environment to grab the new business opportunities and to make plans to overcome new threats. This will lead to higher efficiency and profit for the company.

STEP-2 (MEANING OF RATIOS)

• ACCOUNTS RECEIVABLE TURNOVER RATIO-  This turnover ratio indicates efficiency ratio of the company and customer satisfaction relationship with company. This ratio indicates or shows us how many times a company collects its accounts receivable during a period. In easy words, this indicates how many times or how frequently a company collects its credit sales from customers.

FORMULA-

ACCOUNTS RECEIVABLE TURNOVER RATIO- NET CREDIT SALES / AVERAGE ACCOUNT RECEIVABLE

• ACCOUNTS PAYABLE TURNOVER RATIO- This turnover ratio indicates the liquidity ratio of the company, which shows how frequently or how many times company pay off its accounts payable during a period. It indicates how frequently company pay off its credit purchase's supplier and vendors. When company pay off its credit purchase or accounts payable frequently or doesn't take long period to pay, it means company is financially able to pay off its accounts payable and trustworthy for the credit purchase.

FORMULA-

ACCOUNTS PAYABLE TURNOVER RATIO- TOTAL PURCHASE / AVERAGE ACCOUNTS PAYABLE

STEP-3 (ANALYSIS)

Higher receivable turnover ratio shows the higher or more times a company collects its accounts receivable or credit sales from customers.This indicates efficiency of the company to collects its cash from its customers,which means faster the company collects its accounts receivable, sooner the company will pay its liabilities or accounts payable.

Higher payable turnover ratio shows how early or quickly companies pays off to vendors or its credit purchase. When company pays faster to its credit purchasers, it shows company's better liquidity status.For paying to its vendors, company wants money, which company brings from collecting accounts receivable from its customers.

So,higher receivable turnover ratio than payable turnover ratio indicates a good status and better financial position and performance of a company because higher receivable turnover ratio indicates company efficiency to collects money from its customers and use this money to pay off its liabilities. This gives or indicates a balanced status of a Company.