![]() $15,000 in accounts receivables at the end of the year.Īverage account receivable = (10,000 + 15,000) ÷ 2 = 12,500Īccount receivable turnover = 100,000 ÷ 12,500 = 8 times in a year.$10,000 in accounts receivables at the beginning of the year.Let’s say the Feriors company had the following financial results for last year: However, some companies may use total sales as the numerator rather than net credit sales. Only credit sales create credit, so cash sales are not counted. The reason for using net sales on credit rather than net sales is that cash sales do not generate credit. Average accounts receivable is calculated by dividing the sum of beginning and ending accounts receivable by 2.Net sales = Gross sales – Returns – Allowances – Discounts.The account receivable turnover can be calculated by dividing the net sales revenue by the average accounts receive able, or the following formula:ĪRT ratio = Net sales revenue ÷ Average accounts receivable The low turnover is likely due to weak credit policies, inadequate collection process and/or a client base in financial distress. A high turnover ratio is desirable because it suggests that the company’s debt collection process is efficient, that the company has a quality customer base, or that the company has a conservative credit policy.Ĭonversely, a low account receivable turnover ratio indicates that the company may have a bad credit policy, a bad debt collection method, or that its customers are unreliable or financially unviable. Low values of the previous ratios can sometimes be compensated for if some of the company’s current assets are highly liquid.Ī higher account receivable turnover rate means the business is running efficiently. ![]() What Does the Account Receivable Turnover MeasureĪnalysis can measure liquidity by how quickly a company converts certain assets to cash. It is a measure of how many times old receivables are collected and replaced by new receivables.įinancial managers and executives use the account receivable turnover ratio as a way to monitor and measure cash flow and how well companies manage uses and manage the credit they provide to their customers by estimating how long it takes them to pay down outstanding debt in a year. ![]() The account receivable turnover is calculated by dividing the net sales revenue by the average accounts receive able. The account receivable turnover can measure how well an organization is managing its account receivable. Account receivable turnover ratio is a measure to indicate how quickly a company collects its receivables (credit sales) into cash that can be used in business.
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