Accounts Receivable Turnover Rate Calculator

The Accounts Receivable Turnover Ratio measures how efficiently a company collects payments from its customers. It shows how many times a company's average accounts receivable is sold and collected during a period.

What is Accounts Receivable Turnover Rate?

The Accounts Receivable Turnover Ratio is a financial metric that shows how quickly a company collects money owed to it from customers. It's calculated by dividing the total credit sales by the average accounts receivable balance during the period.

Accounts receivable is the money that customers owe to your business for goods or services they've purchased but haven't paid for yet.

A higher turnover ratio indicates that your company is collecting payments more quickly, which is generally favorable. However, the ideal ratio depends on your industry and business model.

How to Calculate Accounts Receivable Turnover Rate

The formula for Accounts Receivable Turnover Ratio is:

Accounts Receivable Turnover Ratio = Credit Sales / Average Accounts Receivable

Where:

Credit Sales - Total sales made on credit during the period
Average Accounts Receivable - The average balance of accounts receivable during the period

The result is typically expressed as a ratio (e.g., 5.2) or as a percentage (e.g., 520%).

Interpreting the Results

The Accounts Receivable Turnover Ratio provides several insights:

Efficiency - A higher ratio indicates faster collection of receivables
Cash Flow - Faster collection can improve cash flow
Credit Terms - The ratio can help assess the effectiveness of your credit terms
Industry Comparison - Compare your ratio with industry averages

Industry standards vary widely. For example, retail typically has higher ratios than manufacturing due to shorter payment cycles.

Worked Example

Let's calculate the Accounts Receivable Turnover Ratio for a company with the following data:

Credit Sales: $500,000
Average Accounts Receivable: $95,238

Accounts Receivable Turnover Ratio = $500,000 / $95,238 ≈ 5.25

This means the company collects its average accounts receivable balance 5.25 times during the period.

FAQ

What is a good Accounts Receivable Turnover Ratio?: A good ratio depends on your industry. Generally, ratios above 5 are considered good, while ratios below 3 may indicate slow collection.
How does Accounts Receivable Turnover Ratio differ from Days Sales Outstanding?: Both metrics measure receivables collection efficiency. The turnover ratio is a simple ratio, while Days Sales Outstanding converts the ratio to days based on the number of days in the period.
What factors can affect the Accounts Receivable Turnover Ratio?: Factors include credit terms, industry standards, customer payment habits, and the effectiveness of your collections process.
How can I improve my Accounts Receivable Turnover Ratio?: Improve credit terms, implement better collections processes, offer incentives for early payment, and maintain strong customer relationships.
Is Accounts Receivable Turnover Ratio the same as Accounts Receivable Cycle?: No. The turnover ratio is a simple ratio, while the receivables cycle measures the total time from invoice to payment, including discounts and allowances.