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Clients Rotation Ratio Concept
Clients rotation ratio or indicator is an
activity ratio that seeks to measure the efficiency level with which the
company is managing its clients’ credit policy. The higher the clients
rotation ratio value, bigger the efficiency of the credit policy.
Clients’ rotation ratio is calculated by
the division of the total sales at a certain time (increased of taxes
owed to the company by the clients, namely VAT) by the average value of
the clients’ credit in this same time period. This way, the clients’
rotation ratio can be interpreted as the number of times that the amount
of clients’ credit is converted in sales during a certain time period.
If a company practices a more strict
credit policy, clients’ rotation ratio increases. However, sales have a
tendency to decrease since some clients can resort to other suppliers
with more flexible credit policies. So, clients’ credit decisions should
have in consideration these two variables.
An alternative to clients’ rotation ratio
to measure the company’s efficiency in the management of its client’s
credit is the average receipts deadline which indicates the average time
that the company takes to receive from its clients.
Translated from Portuguese
by Susana Saraiva, Portuguese-English and English-Portuguese translation
specialist. Contact: spams@sapo.pt.
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