What is accounts receivable turnover

What's Included. Finance as a Service Includes:. Our Technology. Articles White Papers Videos Events. Case Studies Testimonials. About Us. About Consero Global. Learn More About Consero. Careers Management Team Press. Accounts Receivable Turnover Definition. Reprinted with permission from www. What's Included in FaaS. Industries We Serve. Contact Us. Monthly financials Daily accounting support Management reporting Integrate add-on acquisitions. Blanchard is a dentist who accepts insurance payments from a limited number of insurers, and cash payments from patients not covered by those insurers.

His accounts receivable turnover ratio is 10, which means that the average accounts receivable are collected in That bodes well for his cash flow and his personal goals. But it may also make him struggle if his credit policies are too tight during an economic downturn, or if a competitor accepts more insurance providers or offers deep discounts for cash payments. Ron Harris runs a local yard service for homeowners and few small apartment complexes.

He is always short-handed and overworked, so he invoices customers whenever he can grab a free hour or two. Tracking your accounts receivable ratios over time is crucial to your business. If it dips too low, that is an indication that you need to tighten your credit policies and increase collection efforts.

If it swings too high, you may be too aggressive on credit policies and collections and be curbing your sales unnecessarily. By knowing how quickly your invoices are generally paid, you can plan more strategically because you will have a better handle on what your future cash flow will be. Maintaining a good ratio track record also makes you and your company more attractive to lenders, so you can raise more capital to expand your business or save for a rainy day.

The accounts receivable ratio serves two critical business purposes. First, it enables companies to understand how quickly payments are collected so they can pay their own bills and strategically plan future investments. Secondly, the ratio enables companies to determine if their credit policies and processes support good cash flow and continued business growth—or not.

Tracking your accounts receivables turnover will help you identify opportunities for improvements in your policies to shore up your bottom line.

Tracking the turnover over time can help you improve your collection processes and forecast your future cash flow. Also, it can help you get a bank loan. A higher accounts receivables turnover ratio will be considered a better lending risk by the banker. Like most business measures, there is a limit to the usefulness of the accounts receivables turnover ratio. Average accounts receivable refers to the total sum of beginning and ending accounts receivable over a specific period of time e.

If Company X has a firm Net 30 policy in place, averaging 47 days to collect payment means something is seriously askew.

The company needs to improve this ratio quickly to avoid potential issues such as a cash crunch. An AR turnover ratio of 7.

An industry average of 10 means Company X is lagging behind its peers, while an average ratio of 5. A high accounts receivable turnover ratio is strongly associated with: Efficient collection processes.

A high-quality customer base. Conservative credit policies. Conversely, a low accounts receivable turnover ratio is often seen as a strong negative, as it can indicate: Inefficient collection processes. Extending credit to the customers unwilling or unable to pay. Ill-defined, poorly monitored, or overly generous credit policies. Prioritize consistency. Be clear and communicative. A turn refers to each time a company collects its average receivables.

This ratio shows how efficient a company is at collecting its credit sales from customers. Some companies collect their receivables from customers in 90 days while other take up to 6 months to collect from customers.

In some ways the receivables turnover ratio can be viewed as a liquidity ratio as well. Companies are more liquid the faster they can covert their receivables into cash. Accounts receivable turnover is calculated by dividing net credit sales by the average accounts receivable for that period.