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.
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.
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