Calculating Accounts Receivable Turnover
This simple calculation indicates how efficiently an organization collects money owed by its customers during each accounting period (typically one year).
The ratio shows how many times a year revenues are collected: a high figure indicates that customers settle their invoices promptly and suggests good credit and billing practice. It's also a pretty accurate reflection of the organization's liquidity and general administrative competence.
Accounts receivable turnover is expressed as a ratio, which divides annual sales on credit by average accounts receivable (unpaid invoices). The formula is:
Suppose an organization's total annual sales are $1.14 million, and the average accounts receivable for that year are $95,000. The calculation is:
- It's essential to take the average figure for receivables over the whole accounting period, to iron out any anomalies—for example, seasonal spikes or irregular patterns in sales.
- The ratio is a useful tool for informing credit terms and payment policies.
- Accounts Receivable Turnover is one of a number of measures used to calculate activity or asset utilization ratios (which indicate operational efficiency).
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