Accounts Receivable Turnover Ratio Calculator
This tool calculates the Accounts Receivable Turnover Ratio, a key metric showing how efficiently a company collects its receivables from clients.
Enter the **Net Sales (or Revenue)** and the **Average Accounts Receivable** for the period. The calculator will provide the turnover ratio.
Enter Financial Data
Understanding the Accounts Receivable Turnover Ratio
What is AR Turnover?
The Accounts Receivable (AR) Turnover Ratio is an accounting measure used to evaluate a company's effectiveness in extending credit and collecting debt. It indicates how many times a company collects its average accounts receivable balance during a specific period.
Formula
The formula is straightforward:
Accounts Receivable Turnover Ratio = Net Sales / Average Accounts Receivable
Interpreting the Ratio
- High Ratio: Generally implies efficient credit policies and collection methods. Customers pay quickly.
- Low Ratio: May suggest inefficient collection processes, lenient credit terms, or customers who are slow to pay, potentially indicating bad debt risk.
The ideal ratio varies significantly by industry. Comparing a company's ratio to industry benchmarks is essential.
How to Calculate Average Accounts Receivable
Average Accounts Receivable is typically calculated by adding the beginning and ending accounts receivable balances for a period and dividing by 2:
Average Accounts Receivable = (Beginning AR + Ending AR) / 2
If calculating for a full year, you can use the AR balance from the end of the previous year as the beginning balance.
Accounts Receivable Turnover Ratio Examples
Click on an example to see the calculation:
Example 1: High Turnover
Scenario: A retail store with typically quick customer payments.
1. Known Values: Net Sales = $800,000, Average Accounts Receivable = $40,000.
2. Formula: AR Turnover = Net Sales / Average AR
3. Calculation: AR Turnover = $800,000 / $40,000
4. Result: AR Turnover = 20
Conclusion: This company collects its average receivables 20 times during the period, indicating very efficient collection.
Example 2: Moderate Turnover
Scenario: A B2B service provider with standard 30-day payment terms.
1. Known Values: Net Sales = $1,200,000, Average Accounts Receivable = $100,000.
2. Formula: AR Turnover = Net Sales / Average AR
3. Calculation: AR Turnover = $1,200,000 / $100,000
4. Result: AR Turnover = 12
Conclusion: A ratio of 12 suggests receivables are collected about once a month on average (12 times per year).
Example 3: Low Turnover
Scenario: A company with potentially slow-paying customers or extended credit terms.
1. Known Values: Net Sales = $500,000, Average Accounts Receivable = $125,000.
2. Formula: AR Turnover = Net Sales / Average AR
3. Calculation: AR Turnover = $500,000 / $125,000
4. Result: AR Turnover = 4
Conclusion: A ratio of 4 indicates receivables are collected only 4 times per year, which might be slow depending on the industry.
Example 4: Impact of Increased Sales (Same AR)
Scenario: The same company as Example 2, but sales increased while AR remained stable.
1. Known Values: Net Sales = $1,500,000, Average Accounts Receivable = $100,000.
2. Formula: AR Turnover = Net Sales / Average AR
3. Calculation: AR Turnover = $1,500,000 / $100,000
4. Result: AR Turnover = 15
Conclusion: Increased sales without a proportional increase in AR leads to a higher turnover, suggesting better efficiency or tighter credit controls.
Example 5: Impact of Increased AR (Same Sales)
Scenario: The same company as Example 2, but AR increased while sales remained stable.
1. Known Values: Net Sales = $1,200,000, Average Accounts Receivable = $150,000.
2. Formula: AR Turnover = Net Sales / Average AR
3. Calculation: AR Turnover = $1,200,000 / $150,000
4. Result: AR Turnover = 8
Conclusion: Increased AR without a proportional increase in sales leads to a lower turnover, potentially indicating collection issues or relaxed credit terms.
Example 6: Company with Seasonal Sales Peak
Scenario: A business calculates turnover for a quarter including their busy season.
1. Known Values: Net Sales (for the quarter) = $600,000, Average Accounts Receivable (for the quarter) = $75,000.
2. Formula: AR Turnover = Net Sales / Average AR
3. Calculation: AR Turnover = $600,000 / $75,000
4. Result: AR Turnover = 8 (for the quarter)
Conclusion: The quarterly turnover is 8. To annualize (approximation), multiply by 4: 32 times per year. This highlights the importance of matching the period for Sales and Average AR.
Example 7: Startup with Minimal Credit Sales Initially
Scenario: A new online service mostly requiring upfront payment.
1. Known Values: Net Sales = $100,000, Average Accounts Receivable = $5,000.
2. Formula: AR Turnover = Net Sales / Average AR
3. Calculation: AR Turnover = $100,000 / $5,000
4. Result: AR Turnover = 20
Conclusion: A high turnover reflects that most sales are not on credit, leading to very low average AR relative to sales.
Example 8: Industry with Long Payment Cycles (e.g., Construction)
Scenario: A construction company with large projects and long payment terms.
1. Known Values: Net Sales = $5,000,000, Average Accounts Receivable = $1,500,000.
2. Formula: AR Turnover = Net Sales / Average AR
3. Calculation: AR Turnover = $5,000,000 / $1,500,000
4. Result: AR Turnover ≈ 3.33
Conclusion: A lower turnover like this might be normal in industries with longer payment cycles. Comparison to peers is key.
Example 9: Calculating Average AR First
Scenario: A company wants to find turnover for a year, given AR balances.
1. Known Values: Net Sales = $900,000, Beginning AR = $70,000, Ending AR = $90,000.
2. Calculate Average AR: Average AR = ($70,000 + $90,000) / 2 = $160,000 / 2 = $80,000.
3. Formula: AR Turnover = Net Sales / Average AR
4. Calculation: AR Turnover = $900,000 / $80,000
5. Result: AR Turnover = 11.25
Conclusion: The turnover ratio is 11.25 times for the year.
Example 10: Zero Average Accounts Receivable
Scenario: A business operates entirely on cash or upfront payments, having no accounts receivable.
1. Known Values: Net Sales = $300,000, Average Accounts Receivable = $0.
2. Formula: AR Turnover = Net Sales / Average AR
3. Calculation: AR Turnover = $300,000 / $0
4. Result: Division by zero is undefined. The calculator will report an error.
Conclusion: The ratio cannot be calculated if Average Accounts Receivable is zero. This scenario effectively means the company has infinite turnover (or no credit sales). The tool will typically indicate an error or undefined result in such cases.
Frequently Asked Questions about AR Turnover
1. What does the Accounts Receivable Turnover Ratio measure?
It measures how many times a company collects its average accounts receivable balance over a specific period, indicating the efficiency of its credit and collection efforts.
2. What is the formula for AR Turnover?
The formula is: Accounts Receivable Turnover Ratio = Net Sales / Average Accounts Receivable.
3. Why use Net Sales instead of Gross Sales?
Net Sales (which subtracts returns, allowances, and discounts) represents the actual revenue from sales that would generate accounts receivable. Gross Sales includes figures that don't result in AR.
4. How do I calculate Average Accounts Receivable?
Average AR = (Beginning Accounts Receivable + Ending Accounts Receivable) / 2, for the period being analyzed (e.g., year, quarter).
5. What does a high AR Turnover Ratio mean?
A high ratio generally means the company is collecting its outstanding credit sales more quickly, suggesting effective credit management and collection processes.
6. What does a low AR Turnover Ratio mean?
A low ratio might indicate that the company is taking longer to collect payments, potentially due to lenient credit policies, inefficient collections, or customers struggling to pay.
7. What is a "good" AR Turnover Ratio?
There is no single "good" ratio. It varies significantly by industry, business model, and economic conditions. Comparison to industry averages and historical trends for the same company is crucial for analysis.
8. How often should this ratio be calculated?
It is commonly calculated annually, but can also be calculated quarterly or monthly to monitor trends and seasonal variations in collections.
9. Can I use Gross Sales if Net Sales isn't available?
While Net Sales is preferred for accuracy, if only Gross Sales is available, it might be used as an approximation, but be aware this can inflate the ratio as it doesn't account for returns or discounts.
10. What happens if Average Accounts Receivable is zero?
The ratio cannot be calculated (division by zero). This implies the company has no credit sales or collects all payments upfront, effectively having an infinite turnover rate for credit sales.
