How is accounts receivable turnover computed

Higher efficiency is favorable from a cash flow standpoint as well. If a company can collect cash from customers sooner, it will be able to use that cash to pay bills and other obligations sooner. Accounts receivable turnover also is and indication of the quality of credit sales and receivables. A company with a higher ratio shows that credit sales are more likely to be collected than a company with a lower ratio. Since accounts receivable are often posted as collateral for loans, quality of receivables is important.

Bill offers accounts to all of his main customers. This means that Bill collects his receivables about 3. In other words, when Bill makes a credit sale, it will take him days to collect the cash from that sale.

Financial Ratios Asset Turnover Ratio. Accounts receivable turnover describes the health of a business. Bankrate explains. Accounts receivable turnover is the number of times per year that a business collects its average accounts receivable. Accountants and analysts use accounts receivable turnover to measure how efficiently companies collect on the credit that they provide their customers. Accounts receivable turnover is described as a ratio of average accounts receivable for a period divided by the net credit sales for that same period.

This ratio gives the business a solid idea of how efficiently it collects on debts owed toward credit it extended, with a lower number showing higher efficiency.

To calculate the accounts receivable turnover, start by adding the beginning and ending accounts receivable and divide it by 2 to calculate the average accounts receivable for the period. Take that figure and divide it into the net credit sales for the year for the average accounts receivable turnover.

Be clear and communicative. Your payment terms should be clearly and completely enumerated in all contracts, invoices, and customer communications.

Get flexible with payment options and discounts. Practice proactivity. Collecting outstanding invoices can be challenging in the best of circumstances.

Waiting until customers have high receivable balances that are weeks or even months behind before you get serious makes a tough job even tougher. Establish policies for generating automatic payment reminders at regular intervals.

Invest in automation. Accounting software is a good place to start, but in order to transform data into actionable insights that drive better decision making and improved performance, you need next-gen tools like artificial intelligence, process automation, and advanced analytics. Better still, by integrating it with a comprehensive procure-to-pay software solution like PLANERGY, you can leverage these benefits for all your financial processes to generate even greater value, performance, and savings.

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