Definition
An efficiency ratio, accounts receivable turnover tells the analyst how effectively the company manages the credit extended to customers. The measure is a good indication of the average time needed to convert receivables into cash. The metric relies on information from the income statement (sales) as well as the balance sheet (receivables).
Calculation
Accounts Receivable Turnover = Net Sales on Credit / Average Receivables
Explanation
When calculating this metric, it's preferred to use a monthly average of receivables, and only include sales on credit terms. Typically, most companies require retail credit customers to repay balances in 30 to 60 days. This translates into accounts receivable turnover ratios that are between 6 and 12. If this ratio falls too low, it can indicate problems collecting money from customers.
When drawing conclusions about the relative performance of a company, benchmark comparisons should be made with competitors in the same industry.
Example
Last year, Company A had an average monthly accounts receivable of $3,867,000 and revenues of $29,611,000. Using the above formula, accounts receivable turnover is:
= $29,611,000 / $3,867,000, or 7.66
Based on this information, we know Company A's average repayment term would be 365 days / 7.66 or 47.6 days.
Related Terms
An efficiency ratio, the asset turnover rate is a measure of management's ability to use assets to produce sales. It measures the amount of sales (revenues) generated per dollar of assets. As is commonplace with efficiency metrics, the formula uses information from both the balance sheet (assets) as well as the income statement (revenues).
Moneyzine EditorNovember 6th, 2024
Also known as a statement of financial position, the balance sheet is used to show the financial health of a company at a particular point in time. The balance sheet consists of assets, liabilities, and owner's equity in the company. It is one of the four key financial statements issued by public companies.Moneyzine EditorNovember 6th, 2024
The income statement is a financial accounting report that demonstrates how net income, or profit, is derived from revenues. The main categories appearing on an income statement include revenues, cost of goods sold, operating expenses, non-recurring items and net income.Moneyzine EditorNovember 6th, 2024
The inventory turnover ratio tells the analyst how well a company manages its inventory. This metric requires data from both the income statement (revenues) and balance sheet (inventory).Moneyzine EditorNovember 6th, 2024
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