Accounts receivable turnover is a financial ratio that measures how efficiently a company collects payments from its customers. To calculate accounts receivable turnover, divide your net credit sales by average accounts receivable. This shows how efficiently your business collects customer payments. A higher turnover means faster collections and stronger cash flow, while a lower ratio may indicate payment delays or weak credit policies.
Understand the Accounts Receivable Turnover Formula
The standard formula is:
Accounts Receivable Turnover = Net Credit Sales ÷ Average Accounts Receivable
Where:
- Net Credit Sales = Total sales made on credit (excluding cash sales and returns).
- Average Accounts Receivable = (Beginning AR + Ending AR) ÷ 2.
This formula measures how many times, on average, receivables are collected in a given period (usually one year).
Gather Net Credit Sales Data
To calculate accurately, you need the total sales made on credit, not including cash sales. For example, if your total sales are $500,000, but $150,000 were cash transactions, your net credit sales = $350,000.
Why this matters: Credit sales are the only transactions that generate receivables, so including cash sales would distort results.
Calculate Average Accounts Receivable
Find the AR balance at the beginning and end of the period (from the balance sheet), then average them.
Formula: Average AR = (Beginning AR + Ending AR) ÷ 2
Example:
- Beginning AR = $40,000
- Ending AR = $60,000
Average AR = ($40,000 + $60,000) ÷ 2 = $50,000
Apply the Formula
Now, divide net credit sales by average accounts receivable.
Example:
Accounts Receivable Turnover = $350,000 ÷ $50,000 = 7 times
This means the company collects its average receivables 7 times per year.
Convert to Days Sales Outstanding (DSO)
To add more depth, you can express turnover as the average collection period (Days Sales Outstanding).
Formula: DSO = 365 ÷ AR Turnover
Example: 365 ÷ 7 = 52 days
This means, on average, it takes 52 days to collect payments.
Interpret the Results
- High Turnover Ratio: Indicates efficient collections and strong customer payment behavior.
- Low Turnover Ratio: Suggests delayed collections, poor credit policies, or financial stress among customers.
Industry Benchmark Example:
- Retail businesses typically have high turnover (10–12 times).
- B2B manufacturing companies may have lower turnover (5–7 times) due to longer credit terms.
Use Results to Improve Collection Strategy
Once you calculate the ratio, use it to guide your financial strategy:
- Tighten Credit Policies: Reduce credit terms if turnover is low.
- Offer Early Payment Discounts: Encourage faster payments.
- Automate AR Processes: Use accounts receivable automation software to track overdue invoices and send reminders.
- Review Customer Creditworthiness: Ensure you’re extending credit only to reliable clients.
Example Summary Table
Calculate net accounts receivable by subtracting allowances for doubtful accounts from total AR to see the actual expected cash inflow for accurate financials.
To calculate gross accounts receivable, total all outstanding invoices before allowances, track unpaid balances, and monitor cash flow for effective collections.
To find average accounts receivable, add the beginning and ending balances and divide by two to measure cash flow efficiency and customer payment trends.
To calculate cash collections from accounts receivable, add beginning AR to credit sales and subtract ending AR. Track this to improve cash flow.
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