Activity Ratios: Accounts Receivable Turnover Ratio

The accounts receivable turnover ratio measures how efficiently a company collects payments owed by its customers for credit sales.

It is calculated by dividing the net credit sales by the average accounts receivable during a specific period.

The average accounts receivable is the average of the opening balance of accounts receivable and the closing balance of accounts receivable.

A higher ratio could indicate faster collection of accounts receivable, which is beneficial for cash flow and liquidity.

Alternatively, a lower ratio might suggest that the company needs help collecting accounts receivable or is generously extending credit.

Consider Alpha Corp., which has net credit sales of five hundred thousand dollars for the year, and the average accounts receivable during that period are fifty thousand dollars.

The accounts receivable turnover ratio would be ten, meaning the company collects its average receivables ten times yearly, indicating efficient credit sales management.

Alpha Corp will monitor the accounts receivable to ensure that receivables are being collected promptly, which helps maintain strong cash flow.