3. How is accounts receivable turnover calculated?
Accounts receivable turnover is a financial ratio that represents the number of times a company collects its average accounts receivable balance during a specific period. It measures how efficiently a company manages its credit sales and collects outstanding payments from its customers.
To calculate the accounts receivable turnover, you will need two pieces of information: the average accounts receivable balance and the net credit sales.
1. Determine the average accounts receivable balance: Add the beginning and ending accounts receivable balances for a specific period (e.g., a fiscal year or a quarter), and divide the sum by 2. This yields the average accounts receivable balance.
Average Accounts Receivable = (Beginning Accounts Receivable + Ending Accounts Receivable) / 2
2. Calculate the net credit sales: Net credit sales refer to the total sales made on credit during the period. It excludes cash sales.
3. Divide the net credit sales by the average accounts receivable balance:
Accounts Receivable Turnover = Net Credit Sales / Average Accounts Receivable
The result of this calculation will provide you with the number of times the company collected its average accounts receivable balance during the specified period. This ratio helps assess the efficiency of the company's credit and collections processes. A higher turnover indicates a more efficient management of accounts receivable, while a lower turnover suggests potential issues with collecting payments from customers.