#Account receivable turnover formula how to

$100,000 (net credit sales) / $25,000 (average accounts receivable) = 4 (accounts receivable turnover ratio)Īn accounts receivable turnover ratio of four indicates that your business is collecting your average receivables four times per year, or cycling through your accounts receivable once per quarter. To determine your accounts receivable turnover ratio, you would divide the net credit sales, $100,000 by the average accounts receivable, $25,000, and get four. Let’s say your company had $100,000 in net credit sales for the year, with average accounts receivable of $25,000. Accounts Receivable Turnover Ratio Exampleįor clarity’s sake, let’s look at an example of this accounting formula in use: Therefore, if you have a lower number of payment collections from your customers, you’ll have a lower accounts receivable turnover ratio, and vice versa-if you have a higher number of payment collections from customers, you’ll have a higher ratio.

You’ll divide your net credit sales by your average accounts receivable to calculate your accounts receivable turnover ratio, or rate.Īs a reminder, this ratio helps you look at the effectiveness of your credit, as your net credit sales value does not include cash, since cash doesn’t create receivables. Once you have these two values, you’ll be able to use the accounts receivable turnover ratio formula. On this balance sheet excerpt, you can see where you would pull the accounts receivable number from. You should be able to find your net credit sales number on your annual income statement or on your balance sheet (as shown below). This figure should include your total credit sales, minus any returns or allowances. The first part of the accounts receivable turnover ratio formula calls for your net credit sales, or in other words, all of your sales for the year that were made on credit (as opposed to cash).

#Account receivable turnover formula how to

You can learn how to calculate accounts receivable turnover ratio, therefore, by following these three steps: Step 1: Determine your net credit sales. Net credit sales / Average Accounts Receivable The accounts receivable turnover ratio formula is simple: Accounts Receivable Turnover Ratio Formula The accounts receivable turnover ratio is an accounting calculation used to measure how effectively your business (or any business) uses customer credit and collects payments on the resulting debt.Īs you’ll see below, you can calculate this ratio using the accounts receivable turnover ratio formula, which requires two quantities: net credit sales and average accounts receivable. What Is the Accounts Receivable Turnover Ratio? Accounts Receivable Turnover Ratio Example.