In general, high turnover ratios indicate that your company is effective at collecting payments (or possibly that you have a conservative collection policy). For example, if your company has a 50-day window for customers to make payments, this formula shows you that, on average, client payments are within your policy. This data can be reviewed in context with your other A/R metrics, or it can be assessed on its own. With the data above, here’s how this would look: To get further insight into your finances, examine how many days it takes to collect receivables by dividing your turnover ratio by 365. Note any fluctuations or spikes in the data and how those changes correlate with improvements to your A/R processes. Measure your ratio each month and review how it changes. Your best bet is to check your metrics regularly (ideally on a monthly basis) and compare your own benchmarks over time. There are no benchmarks for a “good” turnover ratio because an accounts receivable turnover ratio analysis is industry- and company-specific. Knowing how to calculate accounts receivable turnover ratio is the first step, but what does it mean for your financial well-being? What Is a Good A/R Turnover Ratio? Here’s an example of an A/R turnover ratio calculation: You can get an average for accounts receivables by adding your A/R value at the beginning of the accounting period to the value at the end of that period, then dividing it in half. To fill in the blanks, take your net value of credit sales in a given time period and divide by the average accounts receivable during that same period. Here’s the accounts receivable turnover ratio formula for your calculations: Looking at it another way, it’s a measure of how well a company manages the credit it extends to its clients. The higher the number, the better your company likely is at collecting outstanding balances. What Is Accounts Receivable Turnover Ratio?Įssentially, the accounts receivable turnover ratio tells you how well you collect money from clients. Let’s look at this indicator in more detail. One key metric for measuring A/R efficiency is your accounts receivable turnover ratio. Accounts receivables (A/R) are an ongoing process of improvement, and like all improvements, companies need metrics to monitor their progress.
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