The financial ratio accounts receivable turnover is a company's annual sales divided by the company's average balance in its Accounts Receivable account during the same period of time.
For example, if a company’s sales for the most recent year were $6,000,000 and its average balance in Accounts Receivable for the same twelve months was $600,000, its accounts receivable turnover ratio is 10. This indicates that on average the company’s accounts receivables turned over 10 times during the year, or approximately every 36 days (360 or 365 days per year divided by the turnover of 10).
Whether the accounts receivable turnover ratio of 10 is good or bad depends on the company's past ratios, the average for other companies in the same industry, and by the specific credit terms given to this company's customers.
It is important to note that the accounts receivable turnover ratio is an average, and averages can hide important details. For example, some past due receivables could be "hidden" or offset by receivables that have paid faster than the average. If you have access to the company's details, you should review a detailed aging of accounts receivable to detect slow paying accounts.
To learn more, see the Related Topics listed below:
After working as an accountant, consultant, and university accounting instructor for more
than 25 years, Harold Averkamp formed AccountingCoach.com in 2003. His goal was to
share his knowledge and passion for teaching accounting with people throughout the
world at a very low cost. Read More...