What is Accounts Receivable Turnover Ratio?

The Accounts Receivable Turnover Ratio is a financial metric that measures the efficiency of a company in managing and collecting its credit sales or accounts receivable (AR). It helps to evaluate how effectively a company is extending credit to its customers and collecting payments on those outstanding amounts. A higher ratio indicates better efficiency in managing and collecting credit sales, while a lower ratio suggests potential issues with credit policies, collection processes, or customer creditworthiness.

The Accounts Receivable Turnover Ratio is calculated by dividing a company’s net credit sales (total sales minus sales returns, allowances, and discounts) by the average accounts receivable during a specific period. The result is usually expressed as a ratio or a number of times.

Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable

The average accounts receivable can be calculated by taking the sum of the beginning and ending accounts receivable balances during the period and dividing by two.

A high Accounts Receivable Turnover Ratio implies that the company is collecting payments from its customers quickly and efficiently, which is generally considered favorable as it indicates better cash flow and a reduced risk of bad debts. A low ratio, on the other hand, might indicate that the company has difficulty collecting payments, has a lax credit policy, or faces issues with customer creditworthiness. In such cases, the company may need to review its credit policies, improve its collection processes, or be more selective in extending credit to customers.

OTHER TERMS BEGINNING WITH "A"

  • A/P or Accounts Payable Aging

    A periodic report that categorizes a company's accounts payable according to the length of time an unpaid invoice has been outstanding. Similar to accounts receivable aging, it is a critical management tool as well as an analytic tool that helps…

  • A/R or Accounts Receivable Aging

    A periodic report that categorizes a company's accounts receivable according to the length of time an invoice has been outstanding. Accounts Receivable Aging is a critical management tool as well as an analytic tool that helps determine the financial health…

  • Account Debtor

    Someone who owes an obligation by virtue of an account, chattel paper, or general intangible.

  • Accounting Insolvency

    Accounting insolvency, similar to balance sheet insolvency, is a financial situation where an individual or organization's liabilities (debts and financial obligations) exceed their assets (cash, investments, property, and other resources). In other words, their net worth is negative. This term…

  • Accounts Payable (A/P)

    Accounts payable (A/P) - The money a company owes its vendors. When one company transacts with another on credit, one will record an entry to accounts payable on their books while the other records an entry to accounts receivable.

  • Accounts Payable Financing

    Accounts Payable Financing allows a company to pay its supplier immediately (cash on delivery or COD) without having to use their own working capital. This is also known as trade credit financing. This type of financing gives the company a…

  • Accounts Receivable (A/R)

    Accounts Receivable are monies owed to a company by their customers (another business, a government entity or individual) for goods or services sold on terms. Accounts receivable are a Current Asset on a company’s Balance Sheet. In most businesses, the…

  • Accounts Receivable Factoring

    Also known as A/R factoring, factoring or general factoring. Factoring designed specifically for trucking companies is referred to as freight factoring.

  • Accounts Receivable Financing

    Accounts Receivable Financing is when a company turns its A/R (accounts receivable) into ready cash versus waiting 30, 45 or even 90 days for their monies. Banks and Asset Based Lending (ABL) finance companies offer this short-term business funding based…

  • Accounts Receivable Verification

    Accounts Receivable Verification is part of the due diligence process of A/R Factoring. The factoring company will verify the accounts receivable of their client’s customer (the Account Debtor). The factor is verifying that the Account Debtor is happy with the…

  • Accrual vs Cash Basis Accounting

    The accrual basis tends to smooth out a company's earnings versus using a cash basis. However, cash basis accounting can better reflect true cash flow and discount any A/R not paid in full for reasons such as slow-pay, bad debt,…

  • Advance

    The amount of money that the factoring company advances to the client when they buy their invoice. The advance is usually a percentage of the gross invoice value and is advanced to the client soon after the invoice is purchased.

  • Advance Rate

    The percentage of the invoice that will be advanced to the client. This rate often varies between 70% and 95% of the gross invoice value.

  • After Action Review (AAR)

    A four-step process developed by the US Army and now used by businesses and other organizations. An AAR is a structured review or debriefs process for analyzing what happened, why it happened, and how it can be done better by…

  • Agent of Record

    A term used to describe a service whereby the provider acts as a third-party intermediary between a staffing firm or client and one or more independent contractors, administering the back-office functions related to engaging independent contractors, including payroll and government…

  • Aging Report

    The accounts receivable aging report is a list by a client by date of any open or unpaid invoices from you to your customers. It is the primary tool to manage the credit you have given to your customers and…

  • Airball in Financing

    Airball or sometimes referred to as a financing gap is a portion of a loan that exceeds the amount supported by the underlying collateral and is dependent on support from the company's cash flow or overall value.

  • Appraisal

    An appraisal is when an expert applies a value to a tangible item such as real estate, a business or an antique. Appraisals are used for tax purposes, disputes or to establish a selling price for the asset appraised.

  • Articles of Incorporation

    Articles of Incorporation or Certificate of Incorporation acts as a charter to establish a new corporation with basic information about the business. The document is filed with the government during the formation of a C corp or S corp. The…

  • Asset

    An asset is anything of value owned by a company or individual that can be converted into cash. Physical assets come to mind, but assets can be intangibles like intellectual property.

  • Asset Based Lending (ABL)

    Asset Based Lending (ABL finance) is a credit facility based on primarily leveraging a company's assets as collateral. An Asset Based Lender is giving you an Asset Based Loan or ABL finance typically tied to inventory, accounts receivable, intellectual property…

  • Assignee

    An Assignee is a person, company or entity who has been assigned and receives the transfer of payments, proceeds, property, title or rights as defined in a legal agreement.

  • Automated Clearing House (ACH) & ACH Loans

    Automated Clearing House (ACH) is a financial network allowing a business to electronically collect payments from their customers either in a single transaction or as recurring payments directly from the customer’s checking or savings account. The term ACH has also…