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.
