What is Accounts Receivable Turnover?

Accounts receivable turnover is a liquidity ratio estimating how rapidly a company may get its receivables. They may calculate it by dividing the annual net sales by the average accounts receivable. Do you want a high accounts receivable turnover?

How does Mary calculate Accounts Receivable Turnover Ratio?

Mary, the accounts receivable manager for a company that sells electronics, uses the company's balance sheet to calculate the company's accounts receivable turnover ratio. According to the balance sheet, the company saw $90,000 in gross credit sales and $20,000 in returns.

Why is a low or declining Accounts Receivable Turnover Ratio bad?

Due to the time value of money principle, the longer a company takes to collect on its credit sales, the more money a company effectively loses, or the less valuable are the company’s sales. Therefore, a low or declining accounts receivable turnover ratio is considered detrimental to a company.

What are accounts receivable ratios?

Accounts receivable ratios are indicators of a company’s ability to efficiently collect accounts receivable and the rate at which their customers pay off their debts. Although numbers vary across industries, higher ratios are often preferable as they suggest faster turnover and healthier cash flow.