The Accounts Receivable Turnover Ratio Calculator is a valuable tool used by businesses to assess their efficiency in collecting outstanding payments from customers. This ratio indicates how many times a company’s accounts receivable are collected and replaced over a certain period, typically a year. It provides insights into the effectiveness of credit and collection policies, as well as the management of accounts receivable.
Formula of Accounts Receivable Turnover Ratio Calculator
The formula for calculating the accounts receivable turnover ratio is:
Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable
Where:
- Net Credit Sales refers to the total sales made on credit terms during a specific period, excluding any returns or allowances.
- Average Accounts Receivable is the average amount of accounts receivable over the same period. It can be calculated as:
Average Accounts Receivable = (Beginning Accounts Receivable + Ending Accounts Receivable) / 2
eneral Terms Table
Here are some general terms related to accounts receivable turnover ratio that people often search for:
| Term | Definition |
|---|---|
| Accounts Receivable | Amounts owed to a company by customers for goods or services. |
| Credit Sales | Sales made on credit terms, allowing customers to pay later. |
| Collection Period | Average number of days it takes to collect accounts receivable. |
| Credit Policy | Guidelines set by a company regarding credit extension and terms. |
Example of Accounts Receivable Turnover Ratio Calculator
Let’s say Company ABC had net credit sales of $100,000 and their beginning accounts receivable was $20,000, while their ending accounts receivable was $15,000.
Using the formula:
Average Accounts Receivable = ($20,000 + $15,000) / 2 = $17,500
Accounts Receivable Turnover Ratio = $100,000 / $17,500 = 5.71 times
This means that Company ABC collects its accounts receivable approximately 5.71 times within the given period.
Most Common FAQs
A: A high ratio suggests that a company efficiently collects payments from customers, indicating effective credit and collection policies.
A: A low ratio may indicate ineffective credit policies, difficulties in collecting payments, or potential liquidity issues.