Since the accounts receivable turnover ratio is an average, it can be hiding some important details. Accounts Receivable Turnover Ratio is an Average Whether the accounts receivable turnover ratio of 10 is good or bad depends on the company's past ratios, the average for other companies in the same industry, and the specific credit terms given to the company's customers.
This indicates that on average the company’s accounts receivables turned over 10 times during the year, or approximately every 36 days (360 or 365 days per year divided by the turnover of 10). As a result, the accounts receivable turnover ratio is: credit sales of $6,000,000 divided by the average amount of accounts receivable of $600,000 = 10 times a year. To illustrate the calculation of the accounts receivable turnover, let's assume that a company’s credit sales for the most recent year were $6,000,000 and its average amount of accounts receivable during that year were $600,000. Example of Accounts Receivable Turnover Ratio Note that only the company's credit sales (or sales on credit) are used in the calculation, since cash sales do not involve accounts receivable. The calculation of the accounts receivable turnover ratio is: credit sales for a year divided by the company's average amount of accounts receivable throughout that year. Collecting accounts receivable is critical for a company to pay its obligations when they are due.
The accounts receivable turnover ratio (or receivables turnover ratio) is an important financial ratio that indicates a company's ability to collect its accounts receivable. What is the accounts receivable turnover ratio? Definition of Accounts Receivable Turnover Ratio
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