How to Calculate AR Turnover

Calculating accounts receivable turnover.

AR turnover, also known as accounts receivable turnover, shows how well a company collects on their sales on credit. Companies often allow customers to pay in the future for goods received, which creates a receivable on the company's balance sheet. Accounts receivable turnover is important when analyzing a company as a manager or investor. Managers and investors can compare the company's efficiency on collecting on credit sales to that of other companies.

Instructions

1. Find the company's net credit sales. Companies will disclose net credit sales on their income statement. For example, Firm A has $500,000 of net credit sales.

2. Calculate the company's average accounts receivable. Average accounts receivable equals the beginning of the year's accounts receivable plus ending accounts receivable, divided by two. In our example, Firm A's beginning accounts receivable is $300,000 and ending accounts receivable is $350,000. Therefore, the average accounts receivable is $325,000.

3. Divide net credit sales by average accounts receivable to calculate accounts receivable turnover. In our example, $500,000 divided by $325,000 equals 1.538.

References

• Investopedia: Receivables Turnover Ratio
• Financial Education: Accounts Receivable Turnover and Days Sales Outstanding