How to Calculate an Accounts Receivable Turnover Ratio

Investors use account receivable turnover to see how quick a company collects on sales.

Accounts receivable turnover looks at the credit policy of a company. The higher the turnover, the tighter controls the company has on its credit sales and collects on its credit sales in a fast manner. The lower the turnover, the more lax the controls on credit sales the company typically has, and it takes the company a longer period of time to collect on its credit sales. It is important to compare the turnover to other companies in a similar industry to understand if the ratio is high or low.

Instructions

1. Add the beginning accounts receivable from the ending accounts receivable. For example, a company has beginning accounts receivable of $30,000 and ending accounts receivable of $20,000, so $30,000 plus $20,000 equals $50,000.

2. Divide the sum of accounts receivable by two to find average accounts receivable. In the example, $50,000 divided by two equals $25,000.

3. Divide the company's total credit sales by the average accounts receivable to calculate accounts receivable turnover. In the example, assume the company has $50,000 of credit sales, so $50,000 divided by $25,000 equals an accounts receivable turnover of two times. To use this ratio, you'll want to compare it to other companies in similar industries. This gives you an idea on how your company is doing compared to a similar one.

References

• Accounting Information: Accounts Receivable Turnover Ratio