Analysis of Accounts Receivable Turnover

Accounts receivable turnover measures how quickly a company collects payments from customers who buy on credit.

It is calculated by dividing the net credit sales, which are total credit sales minus returns and allowances, by the average accounts receivable over a specific period.

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

Consider Prim Corporation, which reports five hundred thousand dollars in net credit sales for the year. Its average accounts receivable during that period is one hundred thousand dollars.

The accounts receivable turnover ratio is five, meaning the company collects its average receivables five times a year, showing strong and efficient credit sales management.

In contrast, a competitor, Delta Corporation, has net credit sales of four hundred thousand dollars and average accounts receivable of two hundred thousand dollars.

The ratio is two. This means receivables are collected only twice a year, showing inefficiencies in the collection process and the need to reassess credit policies.

Analyzing accounts receivable turnover over time against competitors, or against industry benchmarks, helps evaluate a company’