The calculation starts with the total value of sales on credit for the accounting period (cash sales are completed at the time of the transaction they do not generate outstanding payments/accounts receivable and are not included in this total). This produces the average value of accounts receivable for the period.Ĭreate the fraction (ratio). There are two steps to calculate the accounts receivable turnover ratio, which is calculated as a fraction.Īdd the balance for accounts receivable at the beginning of the reporting period to the balance at the end and divide by 2. How Is the Accounts Receivable Turnover Ratio Calculated? Conversely, a low turnover ratio reveals that the business is doing a poor job of collecting payments. This indicates that the business is doing a good job collecting payments from customers. That is, they are paying their bills in a timely manner. A high turnover ratio indicates that the business has a high percentage of customers who are converting their outstanding debt into payments. The turnover ratio represents the average value of accounts receivable for an accounting period in proportion to the total number of credit sales for the same period.Ī high accounts receivable turnover ratio is a positive sign for the business, while a low ratio is a poor sign. The accounts receivable turnover ratio is a figure that is calculated to measure how effectively the business converts outstanding debt from customers into completed payments.Īccounts receivable refers to outstanding short-term debt or payments. What Is the Accounts Receivable Turnover Ratio?
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