The formula for calculating accounts receivable is:ĪR Turnover Ratio = Net Credit Sales ÷ Average Accounts ReceivableĮarlier we mentioned that the accounts receivable turnover ratio takes into account time. How To Calculate The Accounts Receivable Turnover Ratio This makes the ratio intuitively easy to understand when comparing multiple companies across the same industry. In general, as a business becomes more efficient at converting credit sales to cash the accounts receivable turnover ratio is higher. One of the benefits of ratio analysis is that it allows analysts to compare multiple companies across the same sector and industry. The ratio is also a measurement of how long it takes a business to convert credit sales to cash over a given period of time. At its core, the ratio tells us how many times a business converted its receivables to cash over a period of time. The end result is a ratio that quantifies how effective a business is at collecting its receivables. The accounts receivable turnover ratio is a calculation that compares the net credit sales over a period of time to the average accounts receivable balance for the same period. What Is The Accounts Receivable Turnover Ratio? In this post we will cover what the accounts receivable turnover ratio is, how to calculate accounts receivable turnover, and how to interpret the results. It is often used to compare multiple companies across the same industry or sector to identify which ones are best at converting customer credit to cash.īecause cash is so important, both corporate and investment finance professionals monitor accounts receivable turnover regularly to identify if a business faces potential liquidity or solvency issues. The accounts receivable turnover ratio is an important efficiency metric used by management and investors to understand how many times a business converts its receivables to cash over a period of time.
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