Accounts Receivable Turnover Ratio: Definition, Formula & Examples

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Congratulations, you now know how to calculate the accounts receivable turnover ratio. High accounts receivable turnover ratios are more favorable than low ratios because this signifies a company is converting accounts receivables to cash faster. This allows for a company to have more cash quicker to strategically deploy for the use of its operations or growth.

How is accounts receivable turnover in days calculated?

To calculate the receivables turnover ratio, one must use data from the company’s financial statements, primarily the balance sheet. The accounts receivables turnover ratio measures the number of times a company collects its average accounts receivable balance. which of the following represents the receivables turnover ratio? It is a quantification of a company’s effectiveness in collecting outstanding balances from clients and managing its line of credit process. For investors, the receivables turnover ratio serves as a vital evaluation tool of a company’s financial health.

Essentially, AR can be thought of as a line of credit; you aren’t going to keep extended credit if a client isn’t paying you back in a timely manner. If you’re not tracking receivables, money might be slipping through the cracks in your system. Make sure you always know where your money is (and where it’s going) with these tips.

Step 2: Determine average accounts receivable

Stronger relationships with your customers can help you get paid on time, as customers feel a sense of loyalty and responsibility to maintain a good relationship and pay promptly for your goods/services. A strong customer relationship can create a high-quality customer base, improve customer satisfaction, and incentivize repurchasing. While the receivables turnover ratio can be handy, it has its limitations like any other measurement. Regardless of whether the ratio is high or low, it’s important to compare it to turnover ratios from previous years. Doing so allows you to determine whether the current turnover ratio represents progress or is a red flag signaling the need for change.

• This is a great way to increase this ratio as it motivates the clientele of yours to pay faster and be punctual for all future transactions resulting in increased revenue generation.
• It can also be used to compare the efficiency of a business’s AR process to others of a similar size operating in the same industry, providing that they use the same metrics and inputs.
• Generally, the higher the accounts receivable turnover ratio, the more efficient a company is at collecting cash payments for purchases made on credit.
• A high ratio may indicate that the company is collecting payments quickly, but it may also suggest that credit terms are too strict, leading to lost sales.
• The ratio also measures how many times a company’s receivables are converted to cash in a period.
• However, it is possible that it is the nature of the industry and a reflection of its customers, as opposed to a problem with policies or processes.
• A low turnover ratio could also mean you are giving credit too easily, or your customer base is financially unreliable.