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What is Accounts Receivable Turnover Ratio?

This ratio tells you how efficiently a company is collecting its receivables. A high turnover ratio means that the company is collecting its receivables quickly, while a low turnover ratio means that the company is collecting its receivables slowly. This ratio is important for a company because it can indicate whether the company is having trouble collecting its receivables. Once you know your accounts receivable turnover ratio, you can use it to determine how many days on average it takes customers to pay their invoices .

When a business has a high turnover ratio, this indicates its effectiveness in converting credit sales to cash. It means that the business has a reliable customer base who pay their bills on time. It may also indicate that the business has a more effective process for collecting payments on credit purchases. Working capital, cash flows, collections opportunities, and other critical metrics depend on timely and accurate processes. Ensure services revenue has been accurately recorded and related payments are reflected properly on the balance sheet.

What Is the Accounts Receivable Turnover Ratio in Days?

Making sure your company collects the money it is owed is beneficial for both internal and external financial engagements. So practicing diligence in accounts receivable revenues directly affects an organization’s bottom line. Working toward and attaining financial security requires businesses to understand their accounts receivable turnover ratio. This efficiency ratio takes an organization’s receivable balances and receivable accounts into consideration to determine the state of its cash flow. The accounts receivable turnover ratio is comprised of net credit sales and accounts receivable.

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What Is the Accounts Receivable Turnover Ratio?

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• In other words, when making a credit sale, it will take the company 182 days to collect the cash from the sale.
• The net credit sales come out to $100,000 and $108,000 in Year 1 and Year 2, respectively.
• At the other end of the list, the industries with the lowest ratios were financial services (0.34), technology (4.73), and consumer discretionary (4.8).
• The receivable turnover ratio, otherwise known as debtor’s turnover ratio, is a measure of how quickly a company collects its outstanding accounts receivables.
• It is calculated by dividing net credit sales by average accounts receivable.
• Sales Returns – When customers send previously purchased products back to the seller due to the product/merchandise being defective, damaged, or unsatisfactory.

Common contributors to late payments are invoicing errors and payment disputes. If customers have a difficult time getting hold of your AR team to correct billing errors prior to payment, this makes it difficult for you to capture revenue quickly. With AR automation What Is Accounts Receivable Turnover Ratio software, you can automatically prompt customers to pay as a payment date approaches. Because AR departments historically experience a high degree of manual work, streamlining collections processes is the easiest way to improve receivable turnover.

Cash flow risk and how to reduce it

As you can see above, what determines a “good” accounts receivable turnover ratio depends on a variety of factors. Holding the reins too tight can have a negative impact on business, whereas being too lackadaisical about collections leads to limited cash flow. A low accounts receivable turnover is harmful to a company and can suggest a poor collection process, extending credit terms to bad customers, or extending its credit policy for too long.