Accounts receivable turnover ratio allows to estimate the efficiency of business to manage its debts from customers. The following formula is used for calculation purposes and allows you to understand how to calculate accounts receivable turnover ratio:
Accounts Receivable Turnover = Net Credit Sales / Average Accounts Receivable
Since accounts receivable value fluctuates over the period of time the above receivables turnover ratio formula does include average balance, which is derived by adding value of receivables at the beginning and end of accounting period and dividing by 2.
In the calculation it is essential to use net credit sales and exclude cash sales, since they are not related to accounts receivable and it would not be correct to include cash sales into calculation.
It is essential to compare this account receivable turnover ratio over the period of time and estimate whether the business is performing properly is respect of accounts receivable management. Low ratio might indicate issues in accounts receivable management and poor collection of debt from customers. Since accounts receivable are interest free and the business does not earn any additional money on these amounts, it is essential to manage them properly and ensure that customers are paying their debt on time. Debtors turnover ratio does allow to monitor the efficiency of this management.