• Jason Joel

What is Accounts Receivable Turnover Ratio?

Updated: Aug 23

The accounts receivable turnover ratio measures the number of times over a given period (average) that a company collects its accounts receivable.


In this guide, you’ll learn:

  • What is the accounts receivable turnover ratio?

  • What is the accounts receivable turnover ratio formula?

  • How to calculate your accounts receivable turnover ratio?

  • What is the days' sales outstanding (DSO) ratio in accounts receivable?

  • What do the accounts receivable turnover ratio tell you?

  • How to improve your accounts receivable turnover ratio?


What is Accounts Receivable Turnover Ratio?


Imagine at the start of the year a plumbing business had an accounts receivables balance of $50,000. At the end of that year, they noticed their accounts receivables balance was now $85,000.


They start to wonder why and want to know how long it takes the business to collect payment from its customers.


The accounts receivables turnover ratio lets you figure out how long it takes for customers to pay you, and if you need to reevaluate your credit policies.


What is the accounts receivable turnover ratio formula?


The accounts receivable turnover ratio formula is:

Accounts Receivable Turnover Ratio =


Net Credit Sales

Average Accounts Receivable


Net credit sales are the sales offered to customers on credit. These sales do not include the ones your customers paid in cash because cash sales do not create accounts receivable.


The average accounts receivable is the beginning and ending accounts receivable balances during the year (January to December).


How to calculate your accounts receivable turnover ratio?


Calculating your accounts receivable turnover ratio is straightforward. Let’s continue the story I told above.


At the beginning of the year, the plumbing business had an accounts receivables balance of $50,000. During the year, they generated gross credit sales of $250,000, and at the end of the year, they noticed their accounts receivables balance was now $85,000.


To calculate their accounts receivable turnover ratio, they just plugin in these numbers into the formula to get the following:


Accounts Receivable Turnover Ratio =


$250,000 = 3.7

($85,000 + 50,000) / 2


The accounts receivable turnover ratio comes out to 3.7, which means that the plumbing business collected their accounts receivable only 3.7 times during the year.


What is the days' sales outstanding (DSO) ratio in accounts receivable?


Now the plumbing business knows their accounts receivable turnover ratio, but now what? What if they want to know exactly how many days it takes to receive payment?


You just need to take the days in your accounting period, usually 365 days, and divide that with the accounts receivable turnover ratio.


Days' Sales Outstanding (DSO) Ratio =


365 = 98.6 days

3.7


What do the accounts receivable turnover ratio tell you?


Knowing the plumbing company collects its accounts receivable 3.7 times a year (99 days on average) is not good. That means if the plumbing business has a net 30 credit policy, mostly all their customers are paying late.


When assessing the accounts receivable ratio, just keep in mind that a high ratio is good (usually 10+), and a low one is not. If it’s low, you should investigate what could be wrong, and do your best to correct it.


How to improve your accounts receivable turnover ratio?


When you find your customers are late in making payments and you find yourself cash strapped, it is time to take action.


Here a few tips to help you get started collecting your accounts receivables and preventing late payments in the first place.


View Accounts Receivable (A/R) Aging Report


It seems obvious, but knowing who is late will help you target those who might become bad debt, like receivables that are 60-90 days past due. You can do this by viewing your accounts receivable (A/R) aging report. If you use QuickBooks Online, you can print one out very quickly.


The accounts receivable (A/R) aging report will list all your accounts receivable that are current and delinquent. Here you can go through the list and start making calls to remind these customers they are late and, if possible, help them make an immediate payment over the phone or online.


Send Reminders


With so many things a person has to do daily, forgetting to pay a bill is common. Sometimes sending a friendly reminder will help you get your payment. Remind your customers when a bill is due within seven days, and again within three days.


Offer Discounts (Incentives)

Customers love deals, who doesn’t? Offering a discount for early payment can boost your on-time payments and increase your cash flow. You can provide a 1% discount if a customer pays within ten days, such as 1/10 Net 30.


You can also encourage customers to sign-up for auto-pay by offering a discount or another incentive. With auto-pay, you can feel confident you will get your payments on-time.


The accounts receivable turnover ratio is a great way to see how long your business takes to collect payments from customers. Knowing this information can help you correct any issues with your accounts receivable and avoid any cash flow problems in the future.

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