Accounts Receivable Turnover

Accounts Receivable Turnover Ratio

Accounts receivable turnover ratio allows estimating the efficiency of the business to manage its debts from customers – Accounts Receivable.

Accounts receivable turnover formula is the following:

Accounts Receivable Turnover = Net Credit Sales / Average Accounts Receivable

Accounts receivable turnover ratio formula allows understanding how this ratio is calculated and what data is needed.

As accounts receivable balance fluctuates over the period of time, when considering how to calculate accounts receivable turnover, it is essential to use in the formula average accounts receivable balance.

This balance 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 these sales are not related to accounts receivable and it would not be correct to include cash sales into calculation.

Usage of Accounts Receivable Turnover

Accounts receivable turnover measures how quickly accounts receivable are collected over the accounting period in question:

for example if ratio equals to 5, this means the business collects accounts receivable 5 times per period.

If accounts receivable turnover is calculated by dividing annual net credit sales by annual average accounts receivable, then this is an annual measurement. This ratio can also be calculated more often if needed

Compare & Evaluate

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.