Accounts Receivable Turnover Ratio is a measurement of a company's effectiveness of its credit policies and its collections of accounts receivable.
Accounts receivable turnover measures the number of times accounts receivable is collected within the year. The higher the A/R turnover ratio, the better the business is at collecting on credit sales. Strict credit policies may also increase the A/R turnover ratio simply because the clients buying on credit are following through with payment obligations. The accounts receivable turnover ratio could be used as a gauge of future cash flow challenges.
How to Calculate Accounts Receivable Turnover Ratio
The A/R turnover ratio is calculated by dividing the net value of credit sales during a given period by the average accounts receivable during the same period. To determine average accounts receivable, add the beginning and ending A/R balances for the time period and divide by two. Net credit sales are only sales sold on credit and does not include cash payments.
Accounts Receivable Turnover Ratio = Net Credit Sales/Average Accounts Receivable
The accounting team is able to determine the efficiency of their A/R processes after calculating A/R ratio. Tracking this ratio over time will also highlight weaknesses or strengths within the accounts receivable management processes.
See also: How to Increase your Accounts Receivable Turnover Ratio