Accounts receivable turnover 101: Why it’s important and how to calculate it

Your accounts receivable turnover is the ratio of the number of times your company collects your average accounts receivable balance. This measurement can help identify potential AR roadblocks to your payments team.

The accounts receivable turnover formula is a metric for looking at how corporations are performing in receiving payments. This metric can show an accounts receivable (AR) team how their AR processes are impacting their ability to close their outstanding receivables.

How to calculate accounts receivable turnover

The accounts receivable turnover formula is simple. You can calculate it by dividing the net credit sales amount by the average accounts receivable amount. Average accounts receivable is calculated by adding the number of accounts receivables at the beginning of the fiscal year and at the end of the fiscal year and then dividing the sum by two. 

For example: Company A had the following financial results for the year:

• Net credit sales of $750,000
• $64,000 in accounts receivables on January 1 (or the beginning of their fiscal year)
• $74,000 in accounts receivables on December 31 (or the end of their fiscal year) 

Average Accounts Receivable = $64,000 + $74,000 / 2 = $69,000

Accounts Receivable Turnover Ratio = $750,000 / $69,000 = 10.87

Therefore, in this example, Company A collected its receivables on average 10.87 times that year. 

Why is measuring accounts receivable turnover important?

In general, a company with a higher accounts receivable turnover ratio is more efficient than a company with a lower AR turnover ratio. Companies may have a 30-, 60-, or 90-day terms for payment from their customers.

Going back to the Company A example, the company may use its AR turnover ratio to assess the number of days it takes to collect payment throughout the year. Dividing 365 days in the year by 10.87, which would average 33.58 (average accounts receivable turnover in days). Using this example, Company A can see that its customers take 33 days on average to pay their receivables.

The AR Turnover formula can be used to understand how your AR processes are performing: Do you have any outstanding receivables? What payments are actually coming in and how is that tracking over time? The insights your company can gain from analyzing this metric can help you understand the need for automation and savings from an AR solution that can streamline your existing process.

How to improve your AR turnover ratio

Your company’s AR turnover formula helps you understand your accounts receivable processing efficiency. One of the easiest ways a company can work to improve their AR turnover ratio is by removing manual processes, which often lead to higher Days Sales Outstanding (DSO) and slower cash application. You can improve your AR turnover by implementing AR automation.