This Accounts Receivable Turnover Ratio Excel model is for beginners who are looking to learn more about the ratio, and who want to teach themselves based on an example. The A/R turnover ratio, or debtor’s turnover ratio, is an efficiency ratio that measures how the ability of a company to collect cash from its debtors. The A/R turnover ratio measures the number of times over a given period that a company collects its average accounts receivable. This ratio is an efficiency ratio which measures the financial and operational performance of a company. A high A/R turnover ratio means that the company's customer base is able to pay their debts quickly and that the company follows a tight credit policy. On the other hand, a low ratio indicates that the company has an inefficient credit sales collection process, which could arise from extending credit terms to non-creditworthy customers or extending credit policy for too long.
Receivable Turnover Ratio FormulaThe formula for calculating the A/R turnover ratio is expressed as the following: A/R Turnover Ratio = Net Credit Sales / Average Accounts Receivable Where:
- Net credit sales = Sales on credit - Sales returns - Sales allowances
- Average accounts receivable = (Beginning A/R + Closing A/R) / 2
A/R Turnover in DaysThe A/R turnover in days (also referred to as days sales outstanding) measures the number of days it takes a customer to pay off credit sales. The formula is as follows: Receivable turnover in days = 365 / Receivable turnover ratio Generally speaking, a company would want to have a high receivable turnover ratio and a low days sales outstanding to optimize its credit collection process and ensure a consistent cash inflow from credit sales.
Learn More About Accounts Receivable Turnover RatioCheck out CFI's guide on A/R turnover ratio to have a better understanding of its definition, formula, and uses!