By continuing you agree to let us using cookies. We are using them to help make this website better. More details on cookies

Not yet registered? Create a OverBlog!

Create my blog

How to calculate accounts receivable turnover

Knowing how many times a business turns over its accounts receivable is a useful guide to the speed it collects its debts. Here, we look at the turnover formula used and other points to consider once you have the information.

The maths

The ratio itself is fairly simple. Take a business’s annual sales turnover and divide it by the average balance of the accounts receivable (AR) over the same period. For example, if annual sales turnover is £2,000,000, average AR balance is £ 250,000 (2,000,000/250,000), the accounts receivable is 8. The resulting figure gives an indication that on average, the business turned over its accounts receivable eight times over the course of the year. What does this tell me? The number eight may not mean an awful lot to anyone unfamiliar with accounting ratios. However, it does provide the basis to drill down even further. By dividing the number of days in the year (360 or 365 will suffice) by the number eight, we arrive at another figure of 45. These two simple sums tell us that accounts receivable turned over eight times during the year or, put another way, every 45 days. Is this good? To make any real use of this information, it is important to know three other things: how it compares to the industry standard, how it compares to prior years and how it compares to the business’s actual credit policy. If sales turnover is generated on the basis of 30 days credit, then on average, debts are being collected 15 days past due. On the other hand, if the business sells on 60-day terms, it clearly has a robust trade receivables department.

Where can I find the necessary information?

Any well run business will close down their books on a monthly basis and prepare accounts covering this period. 12 months sales turnover figures gives the total sales for the year and by noting each month ends accounts receivable balance, it is easy to arrive at an average monthly figure.
Remember, it is only an average Whilst undoubtedly a useful starting point, you should always bear in mind that any yearly average ratio can mask certain anomalies. For instance, many of very fast moving debt will offset any overdue or even delinquent debt in the figures. In this respect, and whilst you have access to a business’s books, it would be very worthwhile looking at a detailed aged receivables report. Final word Do not stop there though, with 12 months figures at hand, why not do a days sales outstanding calculation for different periods of the year and compare them to the annual average?

Same category articles Accounting

All about: Account reconciliation

All about: Account reconciliation

Account reconciliation practices have come into question over the last decade due to corrupt practices that have caused the collapse of major multi-national firms. This article briefly explains what account reconciliation is and how accountants do it within organisations.
How to get financial aid for single mothers in the UK

How to get financial aid for single mothers in the UK

Being a single mother can really be stressful, especially when you are the breadwinner. There are a lot of financial responsibilities which you need to take care of when you are a single mother. Sometimes, it can also be very difficult for single mothers to get a decent job because they may not have the finances or time to study. The federal and state governments have therefore come up with different programs to help single women financially.
How to use an interest rate calculator

How to use an interest rate calculator

If you are unsure of the effect of debt interest or how much the monthly repayments are going to be each month, it is advisable to use an interest rate calculator to check. Alternatively, you may be attempting to work out how much interest you will receive if you leave money in 90-day online savings accounts for a few years.
Tips on succession planning for family owned businesses

Tips on succession planning for family owned businesses

Succession planning is one of the most difficult processes in business whether they are small enterprises or multinational corporations and this becomes even more difficult in the case of a family owned business. This following article gives some pointers that can apply in family owned firms.