You can then determine your average accounts receivable collection period. In this example, the average amount of accounts receivable is collected 4 times a year, the equivalent of once a quarter. The accounts receivable turnover measures how often you collect the average amount of accounts receivable you are owed. Let’s say, for example, your company’s annual net credit sales are $200,000 and your average accounts receivable for the same year is $50,000.ĭividing $200,000 by $50,000 gives you a ratio of 4. You can calculate this manually or use an online accounts receivable turnover ratio calculator. Once you know your net credit sales and average accounts receivable, you simply divide them to get your ratio:Īccounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable Accounts Receivable Turnover Ratio Formula Example Accounts receivable typically is recorded on your balance sheet and can be derived from this. About Average Accounts ReceivableĪverage accounts receivable, the other crucial number, is determined by adding accounts receivable at the beginning of a given period to accounts receivable at the end of the same period and dividing by 2. Note that your net credit sales are normally entered on your income statement. The easiest way to keep track is by entering cash and credit sales separately into your books at the time of purchase as well as creating separate entries for returns and allowances. You determine your net credit sales by taking total sales on credit and subtracting sales returns (credit issued to customers) and sales allowances (price reductions issued to customers as a result of service issues). Your average accounts receivable represents the amount of money your debtors owe your company. Net Credit Sales = Sales on credit – Sales returns – Sales allowances Your net credit sales represent revenues not paid in cash but generated through sales on credit you extend to your customers.
Net Credit Sales and Average Accounts Receivable Defined Average accounts receivable for the same period.Net credit sales over a selected period.The accounts receivable turnover ratio formula is simple to calculate.
Related: Hiring a Collection Agency: When and How to Tap One How to Calculate Accounts Receivable Turnover Ratio This can be useful if you want to know how efficiently you collect debts for sales made during the holiday shopping season compared with other times of the year. It also can be calculated over a shorter interval, such as a quarter or a month. The accounts receivable turnover ratio is usually calculated on an annual basis, using net credit sales and annual average accounts receivable. The accounts receivable turnover ratio formula does this by comparing your net credit sales (net receivable sales) to your average accounts receivable (average net receivables) for a given period. Your accounts receivable turnover ratio, also known as a receiver turnover ratio or debtor’s turnover ratio, is an efficiency ratio that measures how quickly your company extends credit and collects debt. What Is the Accounts Receivable Turnover Ratio? Here’s a closer look at the accounts receivable turnover ratio, its formula, how to interpret it and what steps you can take to improve it. Left unchecked, this can lead to cash-flow crunches that can potentially jeopardize your company’s financial solvency. A low ratio means your customers owe you money you haven’t collected.įailure to maintain a favorable accounts receivable turnover ratio can mean your cash flow is depleted even if your sales activity is good.
It’s calculated by dividing your net credit sales by your average accounts receivable.Ī high ratio means you’ve successfully collected more of what your customers owe you.
The accounts receivable (AR) turnover ratio measures how efficiently your company collects debts.