Accounts Receivable Turnover Ratio Calculator

The Accounts Receivable Turnover Ratio measures how efficiently a company collects payments from its customers. It shows how many times a company collects its average accounts receivable during a period, typically a year.

What is Accounts Receivable Turnover Ratio?

The Accounts Receivable Turnover Ratio is a financial metric that indicates 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.

This ratio helps businesses understand their cash flow efficiency and credit management practices. A higher turnover ratio generally indicates better collection practices and efficient cash management.

Key Point: Accounts receivable is the money owed to a company by its customers for goods or services delivered but not yet paid for.

How to Calculate Accounts Receivable Turnover Ratio

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 average accounts receivable is calculated by adding the beginning and ending accounts receivable balances and dividing by 2.

Average Accounts Receivable = (Beginning Accounts Receivable + Ending Accounts Receivable) / 2

Interpreting the Accounts Receivable Turnover Ratio

The Accounts Receivable Turnover Ratio is typically expressed as a number of times per year. Industry benchmarks vary by sector, but generally:

Ratios below 4 may indicate slow collection practices or high credit risk
Ratios between 4 and 8 are considered average
Ratios above 8 suggest efficient collection practices

However, the ideal ratio depends on the industry and a company's specific circumstances. For example, service businesses might have higher ratios than manufacturing companies.

Industry Benchmarks for Accounts Receivable Turnover Ratio
Industry	Typical Turnover Ratio
Retail	5-10 times
Manufacturing	4-7 times
Wholesale	6-12 times
Service	8-15 times

Worked Example

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

Credit Sales: $500,000
Beginning Accounts Receivable: $120,000
Ending Accounts Receivable: $150,000

First, calculate the average accounts receivable:

Average Accounts Receivable = ($120,000 + $150,000) / 2 = $270,000

Then, calculate the turnover ratio:

Accounts Receivable Turnover Ratio = $500,000 / $270,000 ≈ 1.85

This means the company collects its average accounts receivable 1.85 times during the period. This is below the industry average, suggesting room for improvement in collection practices.

FAQ

What is a good Accounts Receivable Turnover Ratio?

A good ratio varies by industry. Generally, ratios above 4 are considered good, with higher ratios indicating more efficient collection practices. Service industries typically have higher ratios than manufacturing.

How does Accounts Receivable Turnover Ratio differ from Days Sales Outstanding?

Both metrics measure how quickly a company collects payments, but they're calculated differently. Turnover ratio is calculated by dividing credit sales by average accounts receivable, while Days Sales Outstanding is calculated by dividing average accounts receivable by daily credit sales multiplied by 365.

What factors can affect the Accounts Receivable Turnover Ratio?

Several factors can affect the ratio, including credit policies, customer payment habits, industry norms, and economic conditions. Companies with strict credit policies may have higher ratios.