What is the accounts receivable turnover ratio?

The financial ratio accounts receivable turnover is a company’s annual sales divided by the company’s average balance in its Accounts Receivable account during the same period of time.

For example, if a company’s sales for the year 2007 were $6,000,000 and its average balance in Accounts Receivable for the same twelve months of 2007 was $600,000, its accounts receivable turnover ratio is 10. This indicates that on average the company’s accounts receivables turned over 10 times during the year 2007—or approximately every 36 days (360 or 365 days per year divided by the turnover of 10).

Whether the accounts receivable turnover ratio of 10 is good or bad depends on the company’s past ratios, the average for other companies in the same industry, and by the specific credit terms given to this company’s customers.

It is important to note that the accounts receivable turnover ratio is an average, and averages can hide important details. For example, some past due receivables could be “hidden” or offset by receivables that have paid faster than the average. If you have access to the company’s details, you should review a detailed aging of accounts receivable to detect slow paying accounts.

Learn more about Financial Ratios.

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