Accounts Receivable Turnover Ratio Calculator

The accounts receivable turnover ratio helps businesses measure their effectiveness in extending credit and collecting debts from their customers. A higher ratio indicates that the company is more efficient at collecting receivables, while a lower ratio suggests potential issues with credit policies or customer payment habits. It’s a valuable metric for evaluating a company’s credit and collection processes.

To calculate the average accounts receivable, add the beginning accounts receivable and the ending accounts receivable for the period, and then divide the sum by 2. This calculation provides an average value of the accounts receivable during the specified period.

Several factors can influence the accounts receivable turnover ratio, including credit policies, industry norms, economic conditions, and customer payment behavior. Changes in credit terms, more stringent collection processes, or improved customer payment habits can lead to a higher turnover ratio. Conversely, economic downturns or relaxed credit policies can result in a lower ratio.

A business can improve its accounts receivable turnover ratio by implementing more stringent credit policies, conducting regular credit reviews, offering discounts for early payments, following up on overdue accounts, and using more efficient collection methods. Additionally, monitoring the ratio regularly and comparing it to industry benchmarks can help identify areas for improvement.

While both the accounts receivable turnover ratio and days sales outstanding (DSO) measure a company’s effectiveness in managing receivables, they provide different insights. The accounts receivable turnover ratio shows the number of times a company collects its average accounts receivable during a period, with a higher ratio indicating better performance. In contrast, DSO measures the average number of days it takes a company to collect payment after a sale has been made, with a lower DSO indicating better performance.