Accounts Receivable Turnover Ratio

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Accounts Receivable Turnover Ratio

Accounts Receivable Turnover Ratio =

Net credit sales

Average Receivable

AKA: Sales to receivables ratio

INTERPRETATION

The accounts receivable turnover ratio measures how often a business can turn its accounts receivable into cash during an accounting period.

AR turnover is an important indicator of a company’s financial and operational performance.

Note: expanded calculation

Divide net credit sales by the average accounts receivable for that period. DO NOT include cash sales because they do not create receivables.

EXAMPLE

M&M’s balance sheet shows $20,000 in accounts receivable, $75,000 in gross credit sales, and $25,000 in returns. Last year’s balance sheet showed $10,000 of accounts receivable.

Net credit sales = 75,000 – 25,000 = 50,000

Average accounts receivable = (10,000 + 20,000) / 2 = 15,000

Accounts Receivable Turnover Ratio = 50,000 / 15,000 = 3.33

This means that M&M collects their receivables about 3.3 times a year or once every 110 days. (365 days / 3.33 = 109.61 days)

BENCHMARK: HA, PG, ROT

A high accounts receivable turnover means that your business is efficient and has a tight credit policy. On the other hand, a low receivable ratio means your company may have poor debt-collecting methods and ineffective credit policies.

However, a “good” AR turnover ratio depends on your industry and the circumstance. But a general rule is to keep the total AR percentage over 90 days below 15%-20% of the total AR.

Accounts Receivable Turnover Ratio:

ABBREVIATION KEY:

ROT: Rule of thumb
HA: Historical Average (organization’s historical average)
PG: Peer Group average
EB: Economic Benchmark

DISCLAIMER: The interactive calculators on this site are self-help tools intended to help you visualize and explore your financial information. They are not intended to replace the advice of a qualified professional. Because each business is different, we can not guarantee accuracy.