A debtor is an individual or entity that owes your business money. Typical debtors include customers, particularly in industries that employ customer financing and long payment terms. Debtors may also be the recipient of loans or other sources of financing. One of the financial metrics that allows you to analyze a customer's business cycle and payment history is the turnover ratio.
Calculating Turnover Ratios
Turnover ratios are calculated one of two ways, depending on whether you are calculating the turnover of an asset or a liability. In the case of an asset turnover, divide the debtor's sales by the asset. For example, to calculate working capital turnover, divide the debtor's total sales by its working capital. Working capital is equal to current assets minus current liabilities. In the case of a liability, such as accounts payable turnover, divide the debtor's cost of goods sold by the liability. Other turnover ratios include total asset turnover, inventory turnover, accounts payable turnover, and fixed asset turnover.
Efficiency and Days Outstanding
Asset turnover ratios also are referred to as utilization ratios, and provide an indication of the efficiency with which the debtor utilizes a particular asset. For example, if a debtor's total sales divided by its total assets -- its total asset turnover ratio -- is 5.0, it means that for every dollar of total assets the debtor holds, he generates $5 in sales. Also useful is the ability to convert turnover ratios into time periods by dividing 360 -- the number of days in a year used in some financial calculations -- by the turnover ratio. For example, if the debtor's accounts payable turnover ratio is 10.0, this means the debtor turns over accounts payable ten times per year. Therefore, days accounts payable are outstanding equals 360 divided by 10.0, or 36 days. This means that, on average, the debtor takes 36 days to pay off accounts payable.