Glossary

# Accounts Receivable Turnover

The accounts receivable turnover is a metric that gauges the average frequency with which a company collects its accounts receivables within a specific period.

#### What is accounts receivable turnover?

Accounts receivable turnover is a metric that assesses a company's effectiveness in collecting payments from customers on outstanding invoices. It's calculated by dividing the company's annual net sales revenue by the average amount of outstanding accounts receivable during a specific period. This ratio signifies how quickly a company converts its receivables into cash. A high turnover rate suggests swift payment collection, while a low rate indicates a slower collection process from customers.

#### How do you calculate accounts receivable turnover?

The accounts receivable turnover ratio measures how promptly a company gathers its accounts receivable. It is determined by dividing the company's total annual sales by its average accounts receivable balance. This ratio evaluates a company's ability to collect payments from customers efficiently.

#### Difference between accounts receivable turnover and receivables turnover:

Accounts receivable turnover measures how frequently a company's average accounts receivable balance is turned over in a year. It's calculated by dividing the company's total net credit sales by its average accounts receivable balance.

Receivables turnover indicates how quickly a company collects its receivables. It's calculated by dividing the company's total net credit sales by its average accounts receivable balance, then multiplying the result by 365.

#### Typical ratios for accounts receivable turnover

The average accounts receivable turnover for U.S. companies is about 8.5 times a year, meaning an average collection time of around 8.5 months. The median accounts receivable turnover is about 7 times per year, equating to a collection period of approximately 7 months. However, this ratio varies widely among companies, ranging from turnovers of more than 100 times yearly to less than 1 time per year.

The main factor affecting accounts receivable turnover is the credit terms offered to customers. Longer credit terms lead to longer collection periods. Other influencing factors include sales volume, customer creditworthiness, and the age of accounts receivable.

#### What does accounts receivable turnover tell you?

Accounts receivable turnover is a liquidity measure assessing a company's speed in collecting receivables. Calculated by dividing annual net sales by average accounts receivable, this ratio indicates the efficiency of receivables collection. A high turnover signifies swift collection, while a low ratio suggests slower collection efficiency. This metric is vital in identifying difficulties in receivables collection for a company.

#### What does accounts receivable turnover tell an investor?

Accounts receivable turnover informs an investor about the frequency of a company's collection on outstanding invoices during a specific period. This metric aids investors in understanding how quickly a company converts receivables into cash. A high turnover rate suggests prompt payment collection, while a low rate may indicate challenges in collecting payments. Investors utilize this information to make informed investment decisions.

#### What to watch out for in performing accounts receivable turnover

When calculating accounts receivable turnover, it's crucial to ensure using the correct formula and accurate figures. Avoid double-counting or counting receivables that are not yet due. Additionally, be vigilant not to count any receivables multiple times. Accuracy in assessing these metrics is essential for reliable financial analysis.

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