If the average accounts receivable denominator is a small figure, it will generate a larger number. This figure is divided by the average value of accounts receivable that was calculated in the first step.īecause the credit sales figure is the nominator in this equation, a larger average figure for accounts receivable will generate a lower fraction or ratio. The calculation starts with the total value of sales on credit for the accounting period (cash sales are completed at the time of the transaction they do not generate outstanding payments/accounts receivable and are not included in this total). This produces the average value of accounts receivable for the period.Ĭreate the fraction (ratio). There are two steps to calculate the accounts receivable turnover ratio, which is calculated as a fraction.Īdd the balance for accounts receivable at the beginning of the reporting period to the balance at the end and divide by 2. How Is the Accounts Receivable Turnover Ratio Calculated? Conversely, a low turnover ratio reveals that the business is doing a poor job of collecting payments. This indicates that the business is doing a good job collecting payments from customers. That is, they are paying their bills in a timely manner. A high turnover ratio indicates that the business has a high percentage of customers who are converting their outstanding debt into payments. The turnover ratio represents the average value of accounts receivable for an accounting period in proportion to the total number of credit sales for the same period.Ī high accounts receivable turnover ratio is a positive sign for the business, while a low ratio is a poor sign. The accounts receivable turnover ratio is a figure that is calculated to measure how effectively the business converts outstanding debt from customers into completed payments.Īccounts receivable refers to outstanding short-term debt or payments. This will also enable them to strategize and plan for future business investments while staying on top of their cash flow.What Is the Accounts Receivable Turnover Ratio?.The Accounts receivable turnover ratio can help businesses understand the efficiency of their collections and analyze strategies that work for their business to improve revenue.Why Is Turnover Ratio Important For Your Business? Good Accounts Receivable Turnover RatioĪ good turnover ratio in Accounts Receivable indicates an efficient collection system, and strong credit policies, and/or could be due to a good number of high-quality clients. It doesn't take much to determine a good turnover ratio as it depends on each company's credit policies and the number of days taken for them to collect their receivables. Therefore, Company ABC has an accounts receivable turnover ratio of 25. Let's look at an example to understand better.Ĭompany ABC has beginning accounts receivable of $180,000, ending accounts receivable of $200,000, and net credit sales of $4,750,000. To calculate Average Accounts Receivable, divide the sum of the beginning accounts receivable and the ending accounts receivable by the sum of 2.Īverage Accounts Receivable = (Beginning Accounts Receivable) + (Ending Accounts Receivable) */* 2 Net Credit Sales = Sales on credit – Sales Returns – Sales Allowances Net Credit Sales refer to the total revenue generated by a business on selling products/goods to customers on credit, minus all sales returns and sales allowances. How To Calculate Accounts Receivable Turnover Ratio With Example?Īccounts Receivable Turnover Ratio = Net Credit Sales */* Average Accounts Receivable This allows businesses to keep a check on their cash flow growth as well as working capital costs. It is a measure of how efficiently a business collects its due invoices as well as indicates the financial and operational performance of a business. The Accounts Receivable Turnover Ratio is the average accounts receivable collected during a certain period divided by the net credit sales of the same period. What Is the Accounts Receivable Turnover Ratio? It is an essential measure as it helps a business understand how quickly they collect their receivables. In Accounts Receivable Automation, turnover is the length of time taken to receive the collections offered on credit to customers by a business/organization. For example, when a business sells its inventory in six months and requires new inventory or the total amount of money collected by a company over a certain period for their goods/products. Turnover refers to the total amount of money collected from their sales or how fast they sell their products/goods. What does Turnover mean in Accounts Receivable?
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