Accounts Receivable Turnover

Accounts receivable turnover ratio or receivable turnover ratio measures the liquidity of a company's accounts receivable. Generally, the higher the receivable turnover ratio, the higher the value a lending institution will place on your accounts receivable. A higher turnover ratio will assist you in negotiating to finance for your business or getting the best possible price, should you decide to sell. One of the most important statistics for a credit department is the accounts receivable turnover ratio.

Accounts Receivable Turnover Ratio Formula

It should be noted that only credit sales are used in the receivable turnover calculation. Suppose all sales are included and there is a measurable amount of cash sales. In that case, the calculation will not be true and can be very misleading. Also, if calculating the account receivable turnover ratio on any time period other than an annual or year-to-year basis, you need to account for the period. The accounts receivable turnover ratio is also known as the sales-to-receivable ratio.

The formula for accounts receivable turnover :

Account receivable turnover = total credit sales / average accounts receivable balance

Accounts Receivable Turnover Example

NEWCO CORPORATION sales for its fiscal year ended September 30, 2021 were $66,074,312,000 and Accounts receivable, net for the years ended Sept. 30, 2021 and 2020 were $3,468,199,000 and $3,427,139,000 respectively. Newco's account receivable turnover was:

66,074,312 / (3,468,199 + 3,427,139) / 2 which equates to 19.2 times.

Now a quarterly look at Newco's accounts receivable turnover:

Sales for its fiscal fourth quarter ended September 30, 2021 were $16,390,450,000 and Accounts receivable, net for June 30, 2021 and Sept. 30, 2021 were $3,549,026,000 and $3,468,199,000 respectively. Newco's account receivable turnover for the quarter was:

16,390,450 / (3,468,199 + 3,549,026) / 2 which equates to 4.7 times - annualize would be multiple by 4 = 18.7 times.

Boost your Accounts Receivable Turnover Ratio

To achieve a healthy receivable turnover ratio, many savvy finance and credit professionals leverage the use of professional outsource receivable management services rather than attempting to maintain in-house accounts receivable staff with the associated costs and human resource headaches.