Accounts Receivable Turnover Ratio Definitions, Formula & Examples

20 Jan Accounts Receivable Turnover Ratio Definitions, Formula & Examples

If it is high, it could be because your company is running on a cash basis, or you have high-quality customers who pay on time. However, it could also mean that maybe your collection practices are aggressive or you are too conservative about extending credit to your customers. The accounts receivables turnover is calculated using the account receivables turnover ratio.

It is different from asset turnover, which describes how a company uses its assets to generate revenue. The receivables turnover is calculated by using the formula for the accounts receivable turnover ratio. A high receivables turnover ratio can indicate that a company’s collection of accounts receivable is efficient and they have reliable customers who pay their debts quickly. A high receivables turnover ratio might also indicate that a company operates on a cash basis, or has a conservative credit policy.

How to Calculate (and Use) the Accounts Receivable Turnover Ratio

Another limitation is that accounts receivables can vary dramatically throughout the year. For example, seasonal businesses will have periods with high receivables along with a low turnover ratio and then fewer receivables which can be more easily managed and collected. Furthermore, considering that the receivables turnover ratio assesses its capability of effectively collecting receivables, it is evident that the higher the ratio, the better for the company. A high ratio means that a company collects its money from customers within the right time. For example, a 2 ratio indicates that the company has collected the receivables twice a year, namely every six months. Here we will do the same example of the accounts receivables turnover ratio formula in Excel. You need to provide the two inputs of Net Credit Sales and Average Accounts Receivables.

• So practicing diligence in accounts receivable revenues directly affects an organization’s bottom line.
• See our examples section below for a comprehensive example that applies this step-by-step process.
• The receivable turnover ratio is a measure derived from the receivables turnover.
• In being proactive and persistent in ensuring that debts owed are paid in a timely fashion, businesses can boost the efficiency, reputability and profitability of their financial endeavors.
• Generally speaking, the higher your turnover ratio, the better your chances are of obtaining a loan.

Maintaining a consistent cash flow is a constant requirement; thus, collecting dues is the crux of a stable cash flow requirement. The efficiency of a company’s accounts receivable process is linked to its collections process. Accounts receivable turnover ratios, for example, play an important role in helping businesses optimize collections and increase cash flow. So, to clarify, here is a guide; we have compiled receivables turnover ratio formula everything you need to know about the accounts receivable turnover ratio. Businesses can also calculate the average accounts receivable days by dividing the number of days in the accounting period by the turnover ratio. Rather than looking at the AR ratio and DSO of a business in isolation, benchmarking it against the industry average provides a better perspective of the company’s collection strategies.

Formula and calculation of receivables turnover ratio

For example, if the company’s distribution division is operating poorly, it might be failing to deliver the correct goods to customers in a timely manner. As a result, customers might delay paying their receivables, which would decrease the company’s receivables turnover ratio. The accounts receivable turnover ratio is an accounting measure used to quantify how efficiently a company is in collecting receivables from its clients.

The accounts receivable turnover allows organizations insight into how quickly they collect their payments. This information is essential when the organization plans its future investments and even pays its bills and expenses on time. For example, grocery stores typically have high turnover rates because they get almost instant payments from their customers. In such cash-heavy businesses, the AR turnover https://personal-accounting.org/ is not a good measure of how they are managed. The accounts receivables turnover and asset turnover are often considered to be one and the same. However, there are slight differences between these two terms that shouldn’t be mixed. To know how to use this formula and what it represents, you also need to learn about the accounts receivable turnover and the accounts receivable turnover ratio .