Question

The United States was recently in a recession. What would be the expected effect of a recession on accounts receivable turnover ratios?

Answer 1

The accounts receivable turnover ratio will decline during a recession.

It should be noted that accounts receivable turnover ratio = Net credit sales/average accounts receivable.

Now what will happen during a recession and immediately after that is the absolute value of credit sales will decline on one hand and the amount of accounts receivable will increase on the other hand. Sales will decline as the economy weakens and as such credit sales will also decline on an absolute basis. As the buyers’ liquidity and economic conditions will weaken during recession they will take longer time to repay their dues and hence average accounts receivable will increase.

In the formula provided for the turnover ratio we can see that while the numerator is declining the denominator is increasing. This will pull down the accounts receivable turnover ratio.