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Accounts Receivables Turnover

Moneyzine Editor
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Moneyzine Editor
1 mins
January 3rd, 2024
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Accounts Receivables Turnover

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

  • Asset Turnover Rate
    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).
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  • Balance Sheet
    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.
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  • Income Statement
    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.
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  • Inventory Turnover
    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).
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    January 22nd, 2024

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