How to Calculate Accounts Receivable Turnover Ratio? (2024)

Calculate the accounts receivable turnover rate and find out how well your firm is doing with money. It checks how often your business gathers up its owed money over time. This helps you see if the way you give credit is working and if the money owed to you is likely to come in.

Grasping and using the accounts receivable turnover rate is vital in money handling. A rising accounts receivable turnover rate means your firm is getting cash well. On the flip side, a falling rate might show slacks in how you chase up payments.

Reports show that firms with a strong accounts receivable turnover rate mostly have solid cash flow. Not just that, they also usually have less money lost to bad debts. This ratio is a powerful indicator of your company’s financial health and operational efficiency.

So, how do you calculate the accounts receivable turnover ratio? It’s easier than it might seem. You can calculate this main number with an easy formula. Then, use it to decide your company’s money moves wisely.

Getting the hang of finding this ratio can put you ahead in looking after your firm’s cash. Consequently, it will help you ensure long-term success.

So, let’s jump in and learn how to calculate the accounts receivable turnover ratio.

Table of Contents:

1. What is the Accounts Receivable Turnover Ratio?
2. Why is the Accounts Receivable Turnover Ratio Useful?
3. How to Calculate Accounts Receivable Turnover Ratio?
4. What is a Good Accounts Receivable Turnover Ratio?
5. How to Evaluate the Accounts Receivable Turnover Ratio?
6. Wrap Up

First…

What is the Accounts Receivable Turnover Ratio?

Definition:The accounts receivable turnover ratio shows a company’s efficiency in collecting payments from customers. It is obtained by dividing net credit sales by average accounts receivable during a given time frame. Typically, one year.

A higher ratio indicates that the company is collecting payments more quickly. Conversely, a lower ratio suggests slower collection times.

This ratio is crucial for assessing a company’s liquidity and cash flow management. A high turnover ratio signifies effective credit and collection policies. This could improve cash flow and reduce bad debt risk. On the other hand, a low turnover rate may imply problems with credit management. Or difficulties in collecting customer payments.

Why is the Accounts Receivable Turnover Ratio Useful?

The accounts receivable turnover ratio is the number one financial indicator for firms. It provides useful information regarding financial soundness and efficiency of operations.

How?

• Efficiency Measurement

The accounts receivable turnover ratio measures how fast an organization picks up its customers’ debts. Higher turnover rates indicate that your business converts accounts receivable to cash faster. This reflects strong efficiency in managing its receivables.

• Cash Flow Analysis

The accounts receivables turnover ratio is vital to cash flow analysis. You can determine how quickly your customers pay for their invoices. This helps to predict inflows and outflows better. A higher turnover ratio suggests a healthier cash flow position. Why? It indicates a steady stream of cash coming in from customers.

• Credit Policy Evaluation

The accounts receivable turnover ratio helps to evaluate business credit policies. A low turnover ratio may indicate overly lenient credit terms. So, it will take longer to collect which increases the risk of bad debts. Analyzing this ratio allows you to modify your credit policies for improved cash flow and better credit risk.

• Comparison with Industry Standards

The accounts receivable turnover ratio compares how well your business does to industry standards. Compare to others to find where you can do better. Then, set realistic goals to improve how you manage your business’s receivables.

• Trend Analysis

Lastly, the ratio helps track trends over time. By looking at changes, you can see patterns in accounts receivable management. This allows proactive changes to be made regarding credit policies and collection strategies. Consequently, it improves the overall financial performance.

How to Calculate Accounts Receivable Turnover Ratio?

The accounts receivable turnover ratio provides insights into receivables management efficiency, cash flow performance, and overall financial health. Follow these steps to calculate the accounts receivable turnover ratio.

1. Calculate Net Credit Sales: Subtract returns, discounts, and allowances from total sales revenue.

The formula to calculate net credit sales is:

Net Credit Sales = Total Sales – (Returns + Discounts + Allowances)

The figure you get shows the total credit sales in a specific period.

2. Calculate Average Accounts Receivable: Add the beginning and ending accounts receivable balances for a specific period and divide by two.

The formula is:

This figure represents the average amount of money owed to the company by its customers during the period.

3. Calculate the Accounts Receivable Turnover Ratio: To calculate the accounts receivable turnover ratio, divide net credit sales by average accounts receivable.

The accounts receivable turnover formula is as follows:

This ratio indicates how many times a company’s receivables are collected and replaced within a given period.

4. Calculate the AR Turnover in Days: To determine the AR turnover in days, divide 365 (days in a year) by the accounts receivable turnover ratio.

The accounts receivables turnover equation in days is:

This figure represents the average number of days it takes for a company to collect its accounts receivable.

What is a Good Accounts Receivable Turnover Ratio?

A good accounts receivable turnover ratio is not a one-size-fits-all thing. It involves considering various factors, including industry benchmarks, company size, credit policies, and growth stage. Let’s discuss this in detail.

• Higher than the industry average: A good accounts receivable turnover ratio typically exceeds the industry average. This indicates that the company collects payments from customers more efficiently than competitors.
• Consistent improvement or stability: A favorable sign is a consistent improvement or stability in the accounts receivable turnover ratio over time. This suggests effective receivables management practices and healthy cash flow.
• Industry norms: Comparing the company’s ratio with industry norms provides context for evaluating performance. A ratio that aligns with or surpasses industry standards indicates competitiveness and efficiency.
• Balanced with credit policy: An ideal accounts receivable turnover ratio balances prompt collections and maintains positive customer relationships. It should reflect effective credit policies that encourage timely payments without overly restricting sales.
• Considers company size and growth stage: Additionally, what constitutes a good ratio may vary depending on the company’s size and growth stage. Rapidly growing companies often have higher ratios simply because of the larger sales volumes. Conversely, smaller companies may have lower ratios but still be efficient relative to their sizes.

How to Evaluate the Accounts Receivable Turnover Ratio?

Data analysis can feel like solving a mystery. Only that instead of a magnifying glass, you have rows and columns of numbers.

The role data visualization plays in assessing the accounts receivable turnover ratio is crucial. It brings life into data; it is about storytelling hidden within numbers.

Excel, while functional, often falls short of bringing data to life. This is where ChartExpo steps in as a game-changer. It offers a dynamic solution to Excel’s limitations in data visualization.

With ChartExpo, you can transform your financial data into compelling visual narratives. It makes the accounts receivable turnover ratio easier to understand and act upon.

Let’s learn how to install ChartExpo in Excel.

1. Open your Excel application.
2. Open the worksheet and click the “Insert” menu.
3. You’ll see the “My Apps” option.
4. In the Office Add-ins window, click “Store” and search for ChartExpo on my Apps Store.
5. Click the “Add” button to install ChartExpo in your Excel.

ChartExpo charts are available both in Google Sheets and Microsoft Excel. Please use the following CTAs to install the tool of your choice and create beautiful visualizations with a few clicks in your favorite tool.

Example

Let’s say you want to analyze the accounts receivable turnover ratio data below.

Follow these steps to visualize this data in Excel using ChartExpo and glean valuable insights.

• To get started with ChartExpo, installChartExpo in Excel.
• Now Click on My Apps from the INSERT menu.

• Choose ChartExpo from My Apps, then click Insert.

• Once it loads, scroll through the charts list to locate and choose the “Multi Axis Line Chart”.

• Click the “Create Chart From Selection” button after selecting the data from the sheet, as shown.

• ChartExpo will generate the visualization below for you.

• Click on Settings and change the “Data Representation” of Profit Markup into Bar as follows.

• If you want to add anything to the chart, click the Edit Chart button:

• Click the pencil icon next to the Chart Header to change the title.
• It will open the properties dialog. Under the Text section, you can add a heading in Line 1 and enable Show.
• Give the appropriate title of your chart and click the Apply button.

• Add dollar sign with Avg Acc Receivable values:

• A1dd dollar sign with Net Credit Sales values:

• Change the precision value of Acc Receivable Turnover Ratio values to zero and add the dollar sign:

• Change the Legend shape of Net Credit Sales to Column and click the Applybutton.

• Change the Legend shape of Avg Acc Receivable into a Line and Circle and click the Applybutton.

• Click the Save Changesbutton to persist the changes made to the chart.

• Your final Multi Axis Line Chart will look like the one below.

Insights

• The year 2021 saw a significant increase in the accounts receivable turnover ratio. This indicates improved efficiency in collecting outstanding payments.
• In 2022, there was a significant drop in the turnover ratio. This indicates possible concerns with managing receivables or credit policies.

FAQs

Is a higher or lower receivable turnover ratio good?

A higher accounts receivable turnover ratio is generally considered good. It indicates that a company is collecting payments from customers more quickly. This improves cash flow and reduces the risk of bad debts.

What is a bad accounts receivable turnover?

A bad accounts receivable turnover ratio typically signifies inefficient receivables management. It suggests that a company is taking too long to collect payments from customers. This leads to cash flow issues and potentially indicates problems with credit policies or customer relationships.

How do you fix low accounts receivable turnover?

To improve a low accounts receivable turnover ratio:

• Streamline invoicing and payment processes.
• Offer incentives for early payments.
• Implement stricter credit policies.
• Conduct regular follow-ups on overdue accounts.
• Consider outsourcing collections to a professional agency if necessary.

Wrap Up

To see how well you handle receivables, learn to calculate the accounts receivable turnover ratio. This helps you know how healthy your finances are and how fast you get cash.

This ratio indicates how fast a company collects money from its customers over a given period. A trend analysis, together with comparing the ratio against industry benchmarks, is vital. Why? It will help to pinpoint those areas that need improvement in receivable management.

Moreover, considering the impact of credit policies and customer relationships is crucial for interpreting the ratio accurately. Retaining good control of your company’s cash flow and profitability requires adjusting and overseeing them on an ongoing basis.

You can use the accounts receivable turnover ratio to make smart choices for better financial results. It’s key to analyzing finances to ensure receivables work well in the long haul.

Do not hesitate.

Start calculating and interpreting the accounts receivable turnover ratio with ChartExpo today. It will help you strengthen your business’s financial position and drive growth and success in a dynamic business environment.