![]() Read: Is Accounts Receivable an Asset or Liability?Īccounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable = $1,000,000 / $100,000 = 10 The company’s Accounts Receivable Turnover Ratio should be as follows: Suppose a company, ABC Ltd., had Net Credit Sales of $1,000,000 last year and its average Accounts Receivable Balance was $100,000. Let’s see take a practical example to better understand the concept of Accounts Receivable Turnover Ratio. The Example of Accounts Receivable (AR) Turnover Ratio Accounts Receivable Turnover Ratio in Days = 365 / Accounts Receivable Turnover Ratioįor instance, if a company’s Accounts Receivable Turnover Ratio is 10, its Accounts Receivable Turnover Ratio in Days would be 36.5 days (365 / 10). This version of the formula is known as the Debtors Turnover Ratio Formula in Days or the Accounts Receivable Days Formula, which measures the average number of days it takes for a business to collect payment from its customers. Accounts Receivable Turnover Formula in DaysĪnother way to estimate the Accounts Receivable Turnover Ratio is in days. Alternatively, take the sum of the accounts balance at the end of each month and dividing by the number of months in the allocated period.įor example, if a company had $500,000 in net credit sales during a year and an average accounts receivable balance of $50,000 during that same year, its Accounts Receivable Turnover Ratio would be 10 ($500,000 / $50,000). To determine the Average Accounts Receivable period, add the beginning and ending accounts receivable balances for a given period then divide by two. Returns and allowances are the amount of refund customers receive for the returns of goods or services due to certain reasons. To calculate Net Credit Sales, subtract the total returns and allowances from the total credit sales. Average Accounts Receivable is the amount of money owed to a company by its customers during that same period on average. Net Credit Sales refer to the total credit sales made during a given period. The formula for calculating the Accounts Receivable Turnover Ratio is: Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable Accounts Receivable Turnover Ratio Formula It is a crucial metric for businesses that rely on credit sales and need to manage their working capital. It indicates how tactical the business is at chasing payments, focusing on extending customers’ credits.Īccounts Receivable (AR) itself refers to the amount of money customers owe to the company for purchases of goods or services based on credit. The accounts Receivable (AR) Turnover Ratio is a calculation that measures the average frequency a company collects its accounts receivable balance during a specific period, typically a year. What Is the Accounts Receivable (AR) Turnover Ratio? In this article, Peakflo will help you explore the definition and formula of the Accounts Receivable Turnover Ratio, its importance, and how to calculate and improve it. It serves as an essential tool for businesses to evaluate their credit and collection policies and identify areas for business growth. ![]() ![]() The Accounts Receivable (AR) Turnover Ratio is a financial metric that measures the efficiency of a business in collecting payments from customers. Streamline Accounts Receivable Collections with Peakflo
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