So, as a shortcut, investors can use total sales. In real life, it is sometimes hard to get the number of how much of the sales were made on credit.
Use the following formula to calculate accounts receivable turnover:Īccounts Receivable Turnover = Annual credit sales / Average accounts receivableĪverage Accounts Receivable is the average of the opening and closing balances for Accounts Receivable. It is quantified by the accounts receivable turnover rate formula. In comparison, an accounts receivable turnover decrease means a company is seeing more delinquent clients. Phrased simply, an accounts receivable turnover increase means a company is more effectively processing credit. Accounts Receivable Turnover FormulaĪ profitable accounts receivable turnover ratio formula creates both survival and success in business. Therefore, reevaluate the company’s credit policies to ensure timely receivable collections from its customers. When you hold onto receivables for a long period of time, a company faces an opportunity cost. Whereas, a low or declining accounts receivable turnover indicates a collection problem from its customer. Many companies even have an accounts receivable allowance to prevent cash flow issues.Ī high accounts receivable turnover indicates an efficient business operation or tight credit policies or a cash basis for the regular operation. It is also an important indicator of a company’s financial and operational performance.
#RECEIVABLES TURNOVER RATIO HOW TO#
For more tips on how to optimize your accounts receivable, download your free A/R Checklist below.ĭownload The A/R ChecklistĪccounts Receivable Turnover Analysis MeaningĪccounts receivable turnover measures how efficiently a company uses its asset.
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