What Is an Accounts Receivable Turnover?

What Is an Accounts Receivable Turnover?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

Accounts Receivable Turnover is a measure that helps businesses to understand how effectively they are managing their customer’s credit and the money that is owed by them. It is a ratio that quantifies the number of times a business collects its average accounts receivable balance in a period. A higher ratio would imply that the business collects its receivable more frequently throughout the period which may indicate good credit management practices.

Related Questions

1. How to calculate Accounts Receivable Turnover?

To calculate Accounts Receivable Turnover, divide the total amount of credit sales during a given period by the average accounts receivable during the same period. The average accounts receivable can be found by adding the beginning and ending accounts receivable, then dividing by two.

2. What does a low accounts Receivable Turnover ratio indicate?

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A low accounts Receivable Turnover ratio may signify that the business has a loose credit policy, leading to late payments by its customers. It could also suggest the company’s collection process needs improvement.

3. How can a company improve its Accounts Receivable Turnover ratio?

A company can improve its Accounts Receivable Turnover ratio by implementing stricter credit policies, enhancing its collection processes, and incentivizing customers to make payments promptly via early payment discounts.

4. Are high Accounts Receivable Turnovers always a good sign?

A high Accounts Receivable Turnover can indeed be a good sign, as it suggests efficient collections. However, exceptionally high ratios may indicate that the company has a too rigid credit policy, which could be hindering sales growth.

5. Can Accounts Receivable Turnover be used to assess credit risk?

Yes, the Accounts Receivable Turnover can be used to assess credit risk. A low turnover ratio often indicates higher credit risk as it implies that receivables remain outstanding for long periods. Conversely, a high turnover ratio typically indicates lower credit risk.