# Accounts Receivable Turnover Ratio: Formula, Calculation, Meaning, Example

In the world of accounting, there are so many terms and ratios that it is easy to get confused. The accounts receivable turnover ratio is one ratio that you will want to become familiar with because it is used often in the business world. It is an important business measure that requires you to have a good understanding of your accounts receivable.

In this article, we will be discussing everything you need to know about the accounts receivable turnover ratio. This includes the formula, definition, and an example to help you better understand how this ratio works.

## What is the Accounts Receivable Turnover Ratio

The accounts receivable turnover ratio is a solvency ratio that measures a company’s ability to collect its receivables promptly. In other words, it tells you how quickly and efficiently a company is collecting its money.

This ratio is important because it allows creditors and investors to see how well a company is managing its receivables. A high turnover ratio indicates that a company is collecting its receivables quickly and efficiently. A low turnover ratio, on the other hand, could indicate that the company is having trouble collecting its receivables.

It’s also important for businesses because it helps them keep track of how much money is tied up in receivables. The sooner a company can collect its receivables, the better because that means it has more cash on hand to reinvest in the business or pay off debts.

## Accounts Receivable Turnover Ratio formula

Now that we know what the accounts receivable turnover ratio is, let’s take a look at how it’s calculated. The formula for this ratio is relatively simple and is as follows:

Net Credit Sales / Average Accounts Receivable = Accounts Receivable Turnover Ratio

Net credit sales: This is the total sales made on credit over some time. It is the amount of revenue that a company has generated after deducting any returns or discounts.

Average accounts receivable: This is the average amount of receivables that a company has outstanding during a period. To calculate this, you simply take the beginning and ending receivables for the period and divide them by two.

## Examples

So now that we know the formula, let’s take a look at an example to see how this ratio works in practice.

Let’s say that Company ABC has net credit sales of \$100,000 for the year. Additionally, its beginning receivables were \$10,000 and its ending receivables were \$15,000. Using the formula above, we can calculate the accounts receivable turnover ratio as follows:

Accounts Receivable Turnover Ratio = \$100,000 / {(\$10,000 + \$15,000) / 2}

Accounts Receivable Turnover Ratio = \$100,000 / \$12,500

Accounts Receivable Turnover Ratio = 8

This means that Company ABC is collecting its receivables 8 times per year on average. This is a relatively high turnover ratio and indicates that the company is efficient in collecting its money.

## Conclusion

So there you have it. This is everything you need to know about the accounts receivable turnover ratio. By now, you should have a good understanding of what this ratio is, how it’s calculated, and what it means for businesses. Thanks for reading.

## Further questions

What's your question? Ask it in the discussion forum

Have an answer to the questions below? Post it here or in the forum

Views
Question
300
views
991
views
411
views
LATEST NEWS
Powell's speech, Bitcoin, retail sales - what's moving markets
Stay up-to-date with the latest news - click here
LATEST NEWS
Loop Capital downgrades Reddit stock amid potential valuation peak
Stay up-to-date with the latest news - click here
LATEST NEWS
Euro zone households seek loans again after two years - ECB
Stay up-to-date with the latest news - click here
LATEST NEWS
Elon Musk to contribute \$45 million per month to pro-Trump super PAC - WSJ
Stay up-to-date with the latest news - click here
LATEST NEWS
Tornado-spawning storms blow through the Midwest—including Chicago—and cut power to over 460,000

Storms moved into Indiana and Michigan later Monday night, prompting additional alerts including multiple tornado warnings in Indiana.

Stay up-to-date with the latest news - click here