Definition:
Accounts receivable turnover is a financial ratio that measures how efficiently a company collects payments from its customers. It indicates how quickly a company turns over its accounts receivable, which can impact its cash flow and relationships with customers.
Formula:
Accounts Receivable Turnover = Net Credit Sales / Average Accounts Receivable
How to calculate accounts receivable turnover:
- Determine net credit sales: This is the total sales revenue generated from credit sales during a period.
- Calculate the average accounts receivable: Add the beginning and ending balances of accounts receivable for the period and divide by 2.
- Divide net credit sales by the average accounts receivable: This will give you the accounts receivable turnover ratio.
Why is accounts receivable turnover important?
- Cash flow management: A high accounts receivable turnover indicates that a company is collecting payments from customers quickly, which can improve its cash flow.
- Customer relationships: A low accounts receivable turnover may indicate that a company is having difficulty collecting payments from customers, which could strain relationships and potentially lead to credit restrictions.
- Financial analysis: Accounts receivable turnover is a key financial ratio that is used to assess a company’s financial health and efficiency.
A high accounts receivable turnover is generally considered a positive sign, as it indicates that a company is managing its cash flow effectively and maintaining good relationships with its customers. However, it’s important to consider other factors, such as the industry and the company’s specific circumstances, when interpreting this ratio.
