Accounts receivable turnover
What is accounts receivable turnover?
Accounts receivable turnover is the number of times per year that a business collects its average accounts receivable. Accountants and analysts use accounts receivable turnover to measure how efficiently companies collect on the credit that they provide their customers.
Deeper definition
Accounts receivable turnover is described as a ratio of average accounts receivable for a period divided by the net credit sales for that same period. This ratio gives the business a solid idea of how efficiently it collects on debts owed toward credit it extended, with a lower number showing higher efficiency.
To calculate the accounts receivable turnover, start by adding the beginning and ending accounts receivable and divide it by 2 to calculate the average accounts receivable for the period. Take that figure and divide it into the net credit sales for the year for the average accounts receivable turnover. The formula looks like the following:
- Step 1: Beginning accounts receivable + ending accounts receivable / 2 = net accounts receivable
- Step 2: Net credit sales / accounts receivable = accounts receivable turnover
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Accounts receivable turnover example
Corporation A has a beginning accounts receivable of $125,000 and an ending accounts receivable of $235,000 and a net credit sales of $2.8 million, the formula would look like this:
- Step 1: $125,000 + $235,000 = $360,000 / 2 = $180,000
- Step 2: $2,800,000 / $180,000 = 15.55
Corporation A has an accounts receivable turnover of 15.55. Company C, its biggest competitor has an accounts receivable turnover of 21, while Corporation B has an accounts receivable turnover of 10. Based on these numbers, Corporation B has the strongest collections.