Ratio measuring how efficiently a business collects credit sales relative to its average receivables balance.
Accounts receivable turnover is the ratio that measures how many times a business collects its average receivables balance during a period. It is a common way to evaluate credit collection efficiency and receivables quality.
Slow receivable turnover can point to weak collections, liberal credit terms, or deteriorating customer quality. Faster turnover usually supports liquidity, but it must still be judged against the company’s sales model and credit policy.
The common formula is:
Accounts receivable turnover = net credit sales / average accounts receivable.
Average accounts receivable is often based on beginning and ending balances for the period. The ratio is most useful when compared across periods, against peers, or alongside aging reports and allowance trends.
If net credit sales are 900,000 and average accounts receivable is 150,000, accounts receivable turnover is 6.0 times for the year.
| Net Credit Sales | Average Accounts Receivable | Turnover |
|---|---|---|
| 900,000 | 150,000 | 6.0x |
Higher turnover is not automatically better. Extremely high turnover may reflect overly strict credit terms that suppress sales. The ratio is also less meaningful if cash sales dominate and credit sales are not separated cleanly.