Accounts Receivable Turnover Formula and Calculation

This ratio reveals the speed at which you collect outstanding receivables, providing direct insight into your operational efficiency and customer payment behavior. The Accounts Receivable Turnover Ratio (ARTR) is a financial metric that evaluates how efficiently a company collects outstanding credit sales from its customers. The accounts receivable turnover ratio is a key metric for assessing a company’s efficiency in collecting payments. The receivables turnover ratio is an essential financial metric that provides valuable insights into your company’s collection efficiency and overall financial health.

Industry context

It provides actionable insights for decision-makers, helping them fine-tune credit policies, optimize cash flow, and enhance overall financial performance. Remember that context matters—consider industry norms, company size, and specific business dynamics when interpreting RTR values. This means the company collects its entire receivables balance six times per year, or roughly every two months. This suggests customers are taking about 60 days to pay on average—problematic if the company is offering Net 30 payment terms. With Versapay, you can deliver custom notifications automatically and direct customers to pay online, eliminating much of your team’s need for collections calls. It tells you that your collections team is effectively following up with customers about overdue payments.

Efficiency Measurement

If you apply for a small business loan, your lender may ask to see your accounts receivable turnover ratio to determine if you qualify. Efficiency or quick ratios measure a business’s ability to manage assets and liabilities in the short term. A high accounts receivable turnover ratio usually means your customers pay on time. It also shows your credit collection process works well and you have fewer unpaid bills. Once you’ve calculated the two components, divide your net credit sales by your average accounts receivable for the same period to get your accounts receivable turnover ratio. Companies with efficient collection Accounting Errors processes possess higher accounts receivable turnover ratios.

Invoice

• It can also show your credit policies are flexible, and you may want to review your payment terms and credit checks.
• This figure reflects the company’s ability to generate sales on credit terms.
• With certain types of business, such as any that operate primarily with cash sales, high receivables turnover ratio may not necessarily point to business health.
• A higher ratio shows you’re doing a better job at converting credit sales into cash.

The longer the days sales outstanding (DSO), the less working capital a business owner has. This is where poor AR management can also affect your accounts payable petty cash functions. A higher ratio indicates that a business is collecting payments quickly, which improves cash flow and reduces the risk of bad debts.

Industry averages for accounts receivable turnover ratio

Industries with short billing cycles and primarily cash transactions, such as retail and food services, often have higher accounts receivable turnover ratios. These industries collect payments quickly, minimizing outstanding receivables. Remember that the receivables turnover ratio should be used in conjunction with other financial metrics and qualitative factors to get a complete picture of your business’s financial performance. Regular calculation and analysis of this ratio will help you optimize collection processes, improve cash flow, and make better business decisions. A high receivables turnover ratio means your company collects payments quickly and efficiently.

Build long-term efficiency

In effect, the amount of real cash on hand is reduced, meaning there is less cash available to the company for reinvesting into operations and spending on future growth. A large landscaping firm services an entire town, from apartment complexes to city parks. Thus, invoices do not reach customers immediately, as the team focuses more on providing the service. The following is a step-by-step guide to getting those numbers and a final AR turnover ratio.