Accounts Receivable Turnover

Understanding Accounts Receivable Turnover

The accounts receivable turnover ratio is a key financial metric that measures how efficiently a company collects payments from its customers. This ratio indicates how many times a business can convert its receivables into cash over a specific period, typically a year. A higher turnover ratio suggests that a company is effective in managing its receivables, while a lower ratio may indicate potential issues in collecting payments.

Calculating the Accounts Receivable Turnover Ratio

The formula for calculating the accounts receivable turnover ratio is straightforward:

Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable

In this formula:

• Net Credit Sales refers to the total sales made on credit, excluding any returns or allowances.
• Average Accounts Receivable is calculated by adding the beginning and ending accounts receivable for the period and dividing by two.

Interpreting the Ratio