Accounts Receivable Turnover Ratio: Definition, Formula & Examples

· Accounts Receivables,AR Turnover,Defaulted Accounts

The account receivable turnover ratio can measure how efficiently companies handle collections. If customers don't pay the promised price, cash flow may slow. Conversely, when collections are properly supervised, cash flows are improved.

Identify your net credit sales


Net Credit Sales consist of sales of goods and services that you can get with your Credit Card after removing all returns and allowances. The formula to calculate net credit sales is the one below.


The usefulness of the Accounts Receivables Turnover Ratio


Like many financial ratios, accounts receivable turnover ratios are best used when compared over time. Similarly, an entity can compare the receivable turnover rates in different industries. It can be easier for the customer to see whether credit-card sales processing is on edge or has lost ground. Generally, a comparison should be made by considering businesses with similar business models. Again results can differ depending on the underlying difference in the company comparison.


Determine average accounts receivable


Average accounts payable calculates the average amount for your remaining invoices for a given period. The average account receivables are calculated by dividing the amount of a specific month or quarter receivables by 2.


Accounts Receivable (AR) Turnover Ratio Formula & Calculation


AR Turnover Ratio can be determined by dividing net sales by the average accounts receivable. Net sales are calculated from the credit - sales return - sales allowance. Average accounts payables can be calculated by multiplying starting and closing receivables for one period by two. The formula used to calculate AR turnover rates in one year is as follows: Net annual credit sales average account receivables = account receivable Turnover. For instance, Florals of Flos sells corporate events and accepts credit cards. The gross revenue for the business was 60,000.


Calculate your average accounts receivable


Next is to compute your account payable averaging. The average amount for invoice payment in a given year is based on several factors. You will need the amount available for AR to be added at the end of the year. Divide by three for the median.


The accounts receivable turnover formula is as follows:


Accounts Receivable Turnover = Net Credit Sales / Average Accounts Receivable


Net Credit Sales = Total Sales - Sales made on cash or upfront payments Average Accounts Receivable = (Beginning Accounts Receivable + Ending Accounts Receivable) / 2

The result of this formula indicates how many times a company's accounts receivable are collected during a given period, typically a year. A high turnover ratio suggests that a company is collecting its outstanding debts quickly. In contrast, a low turnover ratio may indicate that it is struggling to collect customer payments.

A high accounts receivable turnover ratio is generally considered favorable because it implies that a company cancan converts its sales into cash quickly, improving its liquidity and cash flow. On the other hand, a low turnover ratio can be a sign of poor credit and collection policies or that the company is extending credit to high-risk customers who may default on their payments.

It's important to note that the accounts receivable turnover ratio should be interpreted in the context of the industry and company norms. For example, a high turnover ratio may be expected for a business with short payment terms. In contrast, a lower ratio may be expected for a business that provides longer payment terms. Additionally, over time, changes in the accounts receivable turnover ratio can provide insights into the company's financial health and performance.