Accounts Receivable Turnover Ratio

Accounts receivable turnover ratio or Debtor's turnover ratio is a key performance indicator to measure your business' efficiency in providing credit and how effectively payments are collected on time. We shall delve deeper into this topic, including how to calculate the turnover ratio and use it for our business/organization.

• What does Turnover mean in Accounts Receivable?

• What is Accounts Receivable Turnover Ratio?

• How to calculate Turnover Ratio with example?

• How to determine a good turnover ratio?

• Why is Turnover Ratio important?

 

What does Turnover mean in Accounts Receivable?

Turnover refers to the total amount of money collected from their sales or how fast they sell their products/goods. For example, when a business sells its inventory in six months and requires new inventory or the total amount of money collected by a business over a certain period for their goods/products.

In Accounts Receivable Automation, turnover is the length of time taken to receive the collections offered on credit to customers by a business/organization. It is an important measure as it helps a business understand how quickly they collect their receivables.

 

What Is Accounts Receivable Turnover Ratio?

Accounts Receivable Turnover Ratio is the ratio of average accounts receivable collected during a certain period divided by the net credit sales of the same period.

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. This allows businesses to keep a check on their cash flow growth as well as working capital costs.

 

How To Calculate Accounts Receivable Turnover Ratio With Example?

 

 

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.

Net Credit Sales = Sales on credit – Sales Returns – Sales Allowances

To calculate Average Accounts Receivable, divide the sum of the beginning accounts receivable and the ending accounts receivable by the sum of 2.

Average Accounts Receivable = (Beginning Accounts Receivable) + (Ending Accounts Receivable) */* 2

Let's look at an example to understand better.

Company ABC has beginning accounts receivable of $180,000, ending accounts receivable of $200,000, and net credit sales of $4,750,000.

To calculate the turnover ratio :

Average Accounts Receivable : $180,000 + $200,000 = $380,000 / 2 = $190,000

Accounts Receivable Turnover Ratio : $4,750,000 / $190,000 = 25

Therefore, Company ABC has an accounts receivable turnover ratio of 25.

 

How To Determine A Good Turnover Ratio?

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.

Good Accounts Receivable Turnover Ratio

A good turnover ratio in Accounts Receivable indicates an efficient collection system, strong credit policies, and/or could be due to a good number of high-quality clients.

 

Why Is Turnover Ratio Important For Your Business?

1. 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.

2. This will also enable them to strategize and plan for future business investments while staying on top of their cash flow.

And more tips on how you can improve your business's turnover ratio, stay tuned to our blog!