In the above example, a 5.6 accounts receivable turnover meant that the company turned over accounts receivable in 65 days throughout the year on average. $1,180,000 / $210,000 = 5.6 What does this Account Receivable Turnover number mean? Thus, average accounts receivable would be:Ĭonsequently, the company’s accounts receivable turnover would be: Of this, $250,000 was comprised of cash sales while there was $50,000 in returns and $20,000 in allowances. Consider a small business that manufactures car parts that had quite a good year with $1,500,000 in total revenue. How about an example?Īlthough the formula is quite simple, it is always easier to understand through a hypothetical example. With these two figures in hand, simply divide the two to find the final result using the formula shown above. (beginning accounts receivable + ending accounts receivable) / 2 To do so, add the accounts receivable numbers from the balance sheet at the start and at the end of the year, then divide it by 2 to find the average. The accounts receivable turnover is usually calculated over an annual period, so you should also find the average accounts receivable over a period of a year. Values for accounts receivables should also be available from the balance sheet. This is the amount of money your business is owed by its customers. Once you have the above figure, move on to the second part – average accounts receivable. Sales on credit – sales returns – sales allowances

You should be easily able to calculate the net credit sales from the balance sheet or income statement using this formula:

Sales returns and allowances are issued to customers due to problems with shipment, services or transactions, which is why they are not included in the net credit sales figure. Also exempt from the value should also be sales returns and allowances. For that reason, the number should not include any revenue generated from cash sales. The net credit sales section represents all revenue generated by the business as a result of sales made on credit by its customers. Net credit sales / average accounts receivable To find the ratio, you should use the formula: How do you calculate the accounts receivable turnover ratio? Therefore, it is very important to know how you can calculate the ratio on your own and understand your business even better. Not only does this help your business operations, but will also be a factor when you’re ever applying for a business loan. The accounts receivable turnover thus helps you determine if your business is good at collecting debts from customers and if not, where to make some changes. Otherwise, your cash flow will suffer and running the business will become difficult. It is nearly impossible to run a business without issuing a credit to your customers, you probably do the same with your suppliers, but the idea is to make sure you collect that debt. Very simply, the accounts receivable turnover is a ratio used to compare how well your business issues credit to its customers and how effective it is at collecting those debts. What is the accounts receivable turnover to be exact? When reviewing your Accounts receivable aging report to forecast your cash flow its important to understand the account receivable ratio and find ways to improve it. Despite the relatively long name, it is actually very easy to calculate and will give you some very useful insights about your business. There are several tools you can use to do this, one of them being the accounts receivable turnover ration. That’s just a fancy way of saying you need to know every aspect of your business to avoid surprises and to make necessary changes. Running a business requires a continuous assessment of operations followed up by strategic and informed modifications.

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