By continuing your visit to this site, you accept the use of cookies. They ensure the proper functioning of our services and display relevant ads. Learn more about cookies and act

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 American tax relief

All about American tax relief

Tax levied by the IRS (Internal Revenue Service) is often considered as non-negotiable. IRS gives relief in the form of specified individual tax credits. Though a tax attorney is best qualified to handle the tax credits, this article will provide an American tax relief guide.
Pros and cons of limited liability companies

Pros and cons of limited liability companies

Many businesses will start as sole-trader or partnerships. This is simple to set up and, when the business and its liabilities are small, carries few real risks. However, as companies grow, incorporation becomes more attractive.
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.
What duties are detailed in an accountant's job description?

What duties are detailed in an accountant's job description?

Accountants have one of the widest job descriptions in the professional world due to the level of detail and vigilance required in financial record keeping. This article gives a brief description of their roles and the type of organisations in which they practise their professions.