Calculate Accounts Receivable Turn Days

Accounts receivable turn days measures how quickly a company collects money owed to it from customers. This metric helps assess a company's efficiency in managing its cash flow and credit policies. A lower turn day number indicates faster collection of receivables, which is generally favorable for financial health.

What is Accounts Receivable Turn Days?

Accounts receivable turn days is a financial metric that measures the average number of days it takes for a company to collect payment on its outstanding receivables. It's calculated by dividing the total accounts receivable by the net credit sales, then multiplying by the number of days in the period.

This metric is important because it provides insight into a company's credit collection efficiency. A lower turn day number suggests that the company is collecting payments more quickly, which can improve cash flow and liquidity. Conversely, a higher turn day number may indicate slower payment collection, which could strain a company's working capital.

Accounts receivable turn days is different from days sales outstanding (DSO), which measures the average number of days it takes to collect payment on all outstanding receivables, including those that have already been invoiced but not yet paid.

How to Calculate Accounts Receivable Turn Days

The formula for calculating accounts receivable turn days is:

Accounts Receivable Turn Days = (Accounts Receivable / Net Credit Sales) × Number of Days in Period

Where:

Accounts Receivable is the total amount of money owed to the company by customers for goods or services delivered but not yet paid for.
Net Credit Sales is the total amount of sales made on credit during the period.
Number of Days in Period is the number of days in the accounting period (typically 30, 360, or 365 days).

For example, if a company has $50,000 in accounts receivable, $200,000 in net credit sales, and a 30-day period, the calculation would be:

Accounts Receivable Turn Days = ($50,000 / $200,000) × 30 = 7.5 days

This means it takes the company an average of 7.5 days to collect payment on its outstanding receivables.

Interpretation of Results

The accounts receivable turn days metric can provide valuable insights into a company's financial health and efficiency. Here are some general interpretations of different turn day ranges:

Turn Days	Interpretation
Below 30 days	Excellent credit collection efficiency. The company is collecting payments quickly, which can improve cash flow and liquidity.
30-60 days	Good credit collection efficiency. The company is collecting payments in a reasonable timeframe, but there may be room for improvement.
60-90 days	Moderate credit collection efficiency. The company may need to improve its credit collection processes or policies to speed up payment collection.
Above 90 days	Poor credit collection efficiency. The company may be struggling to collect payments, which could strain its working capital and cash flow.

It's important to note that these ranges are general guidelines and may not apply to all industries or companies. Additionally, other factors such as industry norms, company size, and credit policies should be considered when interpreting the results.

Example Calculation

Let's walk through a complete example to illustrate how to calculate and interpret accounts receivable turn days.

Scenario

ABC Company has the following financial data for the month of January 2023:

Accounts receivable at the beginning of January: $40,000
Accounts receivable at the end of January: $60,000
Net credit sales for January: $300,000

Step 1: Calculate Average Accounts Receivable

First, calculate the average accounts receivable for the month by taking the average of the beginning and ending balances:

Average Accounts Receivable = ($40,000 + $60,000) / 2 = $50,000

Step 2: Calculate Accounts Receivable Turn Days

Next, use the average accounts receivable and net credit sales to calculate the turn days. We'll use a 30-day period for this example:

Accounts Receivable Turn Days = ($50,000 / $300,000) × 30 = 5 days

Interpretation

The calculation shows that ABC Company has an accounts receivable turn day of 5 days. This indicates that the company is collecting payments very quickly, which is generally favorable for financial health. The low turn day number suggests that the company has an efficient credit collection process and may be able to improve its cash flow and liquidity.

FAQ

What is the difference between accounts receivable turn days and days sales outstanding (DSO)?

Accounts receivable turn days measures the average number of days it takes to collect payment on outstanding receivables, while days sales outstanding (DSO) measures the average number of days it takes to collect payment on all outstanding receivables, including those that have already been invoiced but not yet paid. DSO is calculated by dividing the average accounts receivable by the net credit sales, while accounts receivable turn days is calculated by dividing the average accounts receivable by the net credit sales and then multiplying by the number of days in the period.

How can I improve my accounts receivable turn days?

Improving accounts receivable turn days can involve a variety of strategies, including improving credit collection processes, offering incentives for early payment, negotiating payment terms with customers, and implementing automated billing and payment systems. Additionally, companies can analyze their accounts receivable data to identify trends and patterns, and take corrective action as needed.

What is a good accounts receivable turn days ratio?

A good accounts receivable turn days ratio will vary depending on the industry and company size. Generally, a lower turn day number is favorable, as it indicates faster payment collection. For example, a turn day number below 30 days is typically considered excellent, while a number above 90 days may indicate slower payment collection and potential financial health issues.