How to Calculate Accounts Receivable Turnover in Days

What is Accounts Receivable Turnover?

Accounts receivable turnover measures how efficiently a company collects payments from its customers. It's calculated by dividing the total credit sales by the average accounts receivable balance. The result is expressed as a ratio or in days, which indicates how quickly the company collects payments.

Accounts receivable turnover in days specifically shows the average number of days it takes for a company to collect payments from its customers. A lower number indicates faster collection, which is generally better for cash flow management.

Why is Accounts Receivable Turnover Important?

Accounts receivable turnover is important because it provides insights into a company's credit policies and cash flow management. A higher turnover ratio indicates that the company is collecting payments quickly, which can improve liquidity and working capital. Conversely, a low turnover ratio may signal that the company is having difficulty collecting payments, which could affect its financial health.

For investors and creditors, accounts receivable turnover is a key metric for evaluating a company's financial performance and risk. It helps assess whether the company is managing its credit policies effectively and whether it can meet its financial obligations.

How to Calculate Accounts Receivable Turnover

Calculating accounts receivable turnover involves several steps. First, you need to determine the total credit sales and the average accounts receivable balance over a specific period. The formula for accounts receivable turnover is:

Once you have the turnover ratio, you can convert it to days by multiplying by the number of days in the period. For example, if you're using a 12-month period, you would multiply by 365 to get the turnover in days.

Accounts Receivable Turnover Formula

The formula for accounts receivable turnover is straightforward but requires accurate financial data. Here's a breakdown of the components:

• Total Credit Sales: The total amount of goods or services sold on credit during the period.
• Average Accounts Receivable: The average balance of accounts receivable during the period. This is calculated by adding the beginning and ending accounts receivable balances and dividing by 2.

Once you have the average accounts receivable, you can plug it into the turnover formula to get the ratio. To convert this ratio to days, you multiply by the number of days in the period.

Accounts Receivable Turnover in Days

Accounts receivable turnover in days provides a more intuitive measure of how quickly a company collects payments. It's calculated by dividing the average accounts receivable by the total credit sales and then multiplying by the number of days in the period.

For example, if a company has an average accounts receivable of $50,000 and total credit sales of $200,000 over a 30-day period, the turnover in days would be:

This means the company takes an average of 7.5 days to collect payments from its customers.

Example Calculation

Let's walk through a complete example to illustrate how to calculate accounts receivable turnover in days.

Step 1: Gather Financial Data

Assume the following financial data for a company over a 30-day period:

• Beginning accounts receivable: $40,000
• Ending accounts receivable: $60,000
• Total credit sales: $250,000

Step 2: Calculate Average Accounts Receivable

Add the beginning and ending accounts receivable balances and divide by 2:

Step 3: Calculate Accounts Receivable Turnover Ratio

Divide the total credit sales by the average accounts receivable:

Step 4: Convert to Days

Multiply the turnover ratio by the number of days in the period (30 days):

This means the company takes an average of 150 days to collect payments from its customers.

Interpretation of Results

Interpreting accounts receivable turnover in days involves comparing the result to industry benchmarks and analyzing trends over time. A lower number indicates faster collection, which is generally better for cash flow management. However, it's important to consider other factors, such as credit policies and customer payment behavior.

For example, if a company's accounts receivable turnover in days is 30 days, it means the company takes an average of 30 days to collect payments. This could be considered good if the industry average is higher, but it might indicate a problem if the company has strict credit policies and customers are taking longer than expected to pay.