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Home > Cash Flow Management Calculations > Accounts Receivable Turnover

Cash Flow Management Calculations

# Accounts Receivable Turnover

One of several measures used to assess operating performance, accounts receivable turnover also helps in appraising a company’s credit policy and its cash flow.

## What It Measures

The number of times in each accounting period, typically a year, that a company converts credit sales into cash.

## Why It Is Important

A high turnover figure is desirable because it indicates that a company collects revenues effectively, and that its customers pay bills promptly. A high figure also suggests that a company’s credit and collection policies are sound.

In addition, the measurement is a reasonably good indicator of cash flow, and of overall operating efficiency.

## How It Works in Practice

The formula for accounts receivable turnover is straightforward. Simply divide the average amount of receivables into annual credit sales:

Receivables turnover = Sales ÷ Receivables

If, for example, a company’s sales are \$4.5 million and its average receivables are \$375,000, its receivables turnover is:

4,500,000 ÷ 375,000 = 12

## Tricks of the Trade

• It is important to use the average amount of receivables over the period considered. Otherwise, receivables could be misleading for a company whose products are seasonal or are sold at irregular intervals.

• The measurement is also helpful to a company that is designing or revising credit terms.

• Accounts receivable turnover is among the measures that comprise asset utilization ratios, also called activity ratios.

## Further reading on Accounts Receivable Turnover

### Book:

• Salek, John G. Accounts Receivable Management: Best Practices. Hobohen, NJ: Wiley, 2005

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