Saturday, April 13, 2013

Important notes while using debtors' turnover (days) analysis

In analyzing debtors' balance, it is common for us to compute debtors' turnover (days) in our analytical review procedures to assist us in understanding the fluctuation of debtors' balance. The formula of debtors' turnover (days) is as follows:

Debtors turnver (days) = Average Trade Debtors balance / Sales for the year x 365 days

Generally, in the audit industry, we will compare current year debtors' turnover (day) with preceding period and identify any movement. Nevertheless, it is important to note that debtors' turnover day is the result of a computation based on the formula above. The result may not represent the actual events.

For instance, by using the formula above, an auditor note that the debtors' turnover day has improved 60 days in prior year to 30 days in current year. It is dangerous to conclude that the debtors' turnover day has improved. It is important for us to understand further from management on the reason for the decrease in debtors' turnover day. This is because, assuming that there is no significant changes to the pool of customers, it is unlikely for a customers to pay faster than prior period. Unless, there is special incentive (e.g. discount on early settlement) given to customer in current year to settle outstanding debts promptly.

As a result, we should not solely rely on the result of a formula. We should always match the data computed against actual business scenario to ensure that we understand the business and cross- check the data.


Bushido Soul said...

Debtors Turnover is that another term for days sales outstanding?

Bushido Soul said...

Is debtors turnover days the same as days sales outstanding?