Inventory turnover seems to be pretty simple to understand. To my
knowledge, it is the time that passes from the day an item is purchased to the
day the item is sold. Successful companies should have several inventory
turnovers throughout the year that way they are not sitting on stale products.
"Inventory turnover is the rate that inventory stock is sold, used, and
replaced. It is calculated by dividing the cost of goods by average inventory
for the same period and the higher the ratio tends to point to strong sales
and a lower ratio tends to point to weak sales" (Jenkins, 2022).
The receivable turnover computation was a little bit more confusing to me at
first, but then when I really looked at it, it is very similar to the inventory
turnover computation. The receivable turnover computation measures the
number of times a company collects its average accounts receivable balance.
It is calculated by dividing the net credit sales by the average accounts
receivable. "The accounts receivable turnover ratio is an accounting measure
used to quantify how efficiently a company is in collecting receivables from its
clients; it measures the number of times that receivables are converted to
cash in a given period. A high ratio may indicate that corporate collection
practices were efficient while a low ratio may indicate that corporate
collection practices were the results of inefficient collection practices,
inadequate credit policies, or customers who were not viable or credit-
worthy" (Murphy, 2023).
Jenkins, A. (2022, August 8). Inventory turnover ratio: Trouble or Paradise?.
Murphy, C. B. (2023, May 24). Receivables turnover ratio defined: Formula,
importance, examples, limitations.