Accounts Receivable Turnover Calculator
Results
Accounts Receivable Turnover Ratio: 0 times
Average Collection Period (DSO): 0 days
Understanding the Accounts Receivable Turnover Ratio
The accounts receivable turnover ratio is an efficiency metric that measures how many times a business can collect its average accounts receivable balance during a specific period. It is a critical indicator of how effectively a company manages the credit it extends to customers and how quickly that short-term debt is converted back into cash.
The AR Turnover Formula
To calculate the ratio manually, you need two primary components from your income statement and balance sheet:
- Net Credit Sales: Total sales made on credit, minus any returns or allowances.
- Average Accounts Receivable: The sum of the starting and ending AR balances divided by two.
Practical Example
Imagine a wholesale electronics company, "TechFlow Solutions," wants to evaluate their Q3 performance:
- Net Credit Sales: $500,000
- Beginning AR (July 1): $40,000
- Ending AR (Sept 30): $60,000
First, calculate the average AR: ($40,000 + $60,000) / 2 = $50,000.
Next, calculate the turnover: $500,000 / $50,000 = 10.0.
This means TechFlow Solutions collected its receivables 10 times during the quarter. To find the collection period in days, divide 365 (or 90 for the quarter) by the ratio: 90 / 10 = 9 days.
What Do the Numbers Mean?
High Turnover Ratio: Generally indicates that a company's collection of accounts receivable is efficient and that the company has a high proportion of quality customers that pay their debts quickly. It may also suggest a conservative credit policy.
Low Turnover Ratio: This might suggest that the company has a poor collecting process, bad credit policies, or customers that are not financially viable. However, a very low ratio could also be a result of a company changing its credit policy to offer longer terms to spur sales.