Accounts Receivable Turnover

Accounts Receivable Turnover (AR Turnover) is a ratio that measures how effectively a business is extending credit and collecting debts on that credit. The accounts receivable turnover ratio is an indication of the liquidity of the receivables. A higher ratio is favorable as receivables are being collected more frequently.

The formula to calculate the accounts receivable turnover is:

Accounts Receivable Turnover = Net Credit Sales / Average Accounts Receivable

Here are some details about the components:

– Net Credit Sales: This is the revenue a company earns from credit sales, subtracted by any returns or allowances.

– Average Accounts Receivable: This is the average of the accounts receivable a company has during the period under study. It is calculated by adding the beginning and ending accounts receivable for the period and dividing by 2. Accounts receivable is the money owed to a company by its debtors.

Once you have the turnover ratio, if you want to know the average number of days it takes for a company to collect its receivables, you can divide the number of days in the period by the turnover ratio. This is often referred to as “Days Sales Outstanding” or DSO.

It’s important to note that the ‘ideal’ accounts receivable turnover can vary greatly depending on the industry, so it’s most useful to compare this metric to other companies within the same industry.