You need this information to calculate the two figures in the turnover ratio: net credit sales and average accounts receivable. Make note of the accounts receivable for the beginning and end of the period you're using, the gross credit sales and the returns. Review your balance sheetīefore you calculate the accounts receivable turnover ratio, review the company's balance sheet. You can use these steps to calculate accounts receivable turnover for a company or department: 1. Related: FAQ: What Is Accounts Receivable, Revenue or Asset? How to calculate accounts receivable turnover For example, if the result is 2.1, that means the company's accounts receivable team collected the average amount receivable about two times during the measured period. This formula results in a ratio, which typically manifests as a decimal. Here's the accounts receivable turnover formula:Īccounts receivable turnover ratio = net credit sales / average accounts receivable Related: Learning About Being an Accounts Receivable Specialist What is the formula for accounts receivable turnover? For example, if you're going with a month, you'd take the sum of a company's receivables at the beginning of the month and end of the month and divide this figure by two to get the average. Here's the formula for average accounts receivable:Īverage accounts receivable = (Beginning accounts receivable balance + ending accounts receivable balance) / 2 Related: Net Sales: Definition and How To Calculate It Average accounts receivableĪverage accounts receivable is the sum of a company's starting and ending accounts receivable during a given period, divided by two. You can typically find net credit sales on the company's income statement for the period you're reviewing. Therefore, by using net credit sales, you're better able to determine a company's efficiency. The accounts receivable turnover ratio uses net credit sales rather than cash sales since cash sales don't result in receivables. Net credit sales = gross credit sales - returns The net credit sales formula is as follows: They're sales without returns and refunded sales. Net credit sales are the sales you collect the cash at a later date. Here's what those terms mean: Net credit sales To calculate the accounts receivable turnover ratio for a company or department, you need to know the net credit sales and the average accounts receivable for the time you want to measure. Related: 18 Examples of Accounts Receivable Goals and Objectives What does the accounts receivable turnover ratio include? If the company's account receivable turnover ratio decreases over time, that might be a sign that the accounts receivable process at the company is becoming less effective since it takes longer for customers to pay for their purchases. Companies need revenue from credit purchases to operate, so it's important to collect accounts receivables at a steady pace. This ratio shows how efficient a company's accounts receivables department is at collecting unpaid money. Related: Q&A: What Is Accounts Receivable and How Does It Work? Why is the account receivable turnover ratio important? Accounts receivable is the amount of money that customers owe a company for products or services rendered.įor example, if a company had $50,000 of average receivables during a year and then collected $150,000 of receivables during the same timeframe, the business collected its average accounts receivables during that year. What is the accounts receivable turnover ratio?Īccounts receivable turnover is an efficiency ratio that measures the number of times a company can collect its average accounts receivables during a specific period, usually a year. In this article, we define the accounts receivable turnover ratio, explain the associated formula, list the steps for calculating accounts receivable turnover and provide you with an example to help you better understand the calculation. Learning more about this valuable metric can help you expand your understanding of financial management. If you work in the accounts receivable department of a company, you might use the accounts receivable turnover ratio to measure how effectively the department collects outstanding debt from customers who made purchases using credit. Professionals use many metrics to evaluate how efficient their business or department is at collecting revenue.
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