accounts receivable turnover formula example

This, in turn, is a very crucial factor for companies when they are applying for bank loans, reinvesting capital into their business operations, or attempting to attract third-party investors.

As a result, expenses associated with accounts receivable will be lowered, thereby increasing the balance sheet’s health. In essence, when a business is able to manage its accounts receivables effectively, its cash flow becomes increasingly stable and predictable. Such strategies may include executing an effective debt collection procedure or conducting proper credit checks on the customers before agreeing to serve them. On the other hand, a low accounts receivable turnover ratio suggests the management team’s incompetency in collecting its customer’s payments punctually.ĭeveloping solid cash flow management strategies is vital for all companies if they seek to maintain a healthy cash position. The accounts receivable turnover ratio is typically expressed as the net credit sales divided by the average accounts receivable balance during the specified period.Ĭompanies generally aim for a high accounts receivable turnover ratio as it indicates an efficient debt collection procedure employed by the firm.

Such durations are often measured on a monthly, quarterly, or annual basis.Ĭalculating the company’s accounts receivable turnover is a critical financial metric to assess how soon a business can recover the money it is owed by its customers/clients after having delivered its products and/or services upfront. The accounts receivable turnover measures the number of times a business is able to convert its outstanding accounts receivables to cash within a certain period.

Accounts receivable turnover formula example