Accounts Receivable Turnover Definition
Accounts receivable turnover analysis can be used to determine if a company is having difficulties collecting sales made on credit. The higher the turnover, the faster the business is collecting its receivables. In addition, express it in the following ways:
- Accounts receivable turnover rate
- Accounts receivable turnover in days
- A/R turnover average
- And more
A useful tool in managing and improving accounts receivable Turnover ratio indicates how many times the accounts receivable have been collected during an accounting period receivable turnover is the Flash Report.
For more tips on how to optimize your accounts receivable, download your free A/R Checklist below.
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Accounts Receivable Turnover Analysis Meaning
Accounts receivable turnover measures how efficiently a company uses its asset. It is also an important indicator of a company’s financial and operational performance. Many companies even have an accounts receivable allowance to prevent cash flow issues.
A high accounts receivable turnover indicates an efficient business operation or tight credit policies or a cash basis for the regular operation.
Whereas, a low or declining accounts receivable turnover indicates a collection problem from its customer. When you hold onto receivables for a long period of time, a company faces an opportunity cost. Therefore, reevaluate the company’s credit policies to ensure timely receivable collections from its customers.
Accounts Receivable Turnover Formula
A profitable accounts receivable turnover ratio formula creates both survival and success in business. Phrased simply, an accounts receivable turnover increase means a company is more effectively processing credit. In comparison, an accounts receivable turnover decrease means a company is seeing more delinquent clients. It is quantified by the accounts receivable turnover rate formula.
Use the following formula to calculate accounts receivable turnover:
Accounts Receivable Turnover Calculation
Average Accounts Receivable is the average of the opening and closing balances for Accounts Receivable.
In real life, it is sometimes hard to get the number of how much of the sales were made on credit. So, as a shortcut, investors can use total sales. When this is done, it is important to remain consistent if the ratio is compared to that of other companies.
For example, assume annual credit sales are $10,000, accounts receivable at the beginning is $2,500, and accounts receivable at the end of the year is $1,500.
The accounts receivable turnover is: 10,000 / ((2,500 + 1,500)/2) = 5 times
If you want more ways to add value to your company, then download your free A/R Checklist to see how simple changes in your A/R process can free up a significant amount of cash.
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For statistical information about industry financial ratios, please go to the following websites: www.bizstats.com and www.valueline.com.