Accounts Receivable Turnover Calculator
Accounts Receivable Turnover Calculator
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An Accounts Receivable Turnover Calculator measures how efficiently a business collects money owed by customers during a specific accounting period. It shows how many times, on average, a company converts its accounts receivable into cash through credit sales.
Accounts receivable represents money customers owe a business for goods or services purchased on credit. A higher turnover generally means the business is collecting its receivables more frequently, while a lower turnover can indicate that customers are taking longer to pay.
The calculator is useful for analyzing credit sales, customer payment behavior, collection efficiency, and working capital management.
What Is Accounts Receivable Turnover?
Accounts receivable turnover, often abbreviated as AR turnover, measures the number of times a company collects its average accounts receivable during an accounting period.
The standard formula is:
Accounts Receivable Turnover = Net Credit Sales ÷ Average Accounts Receivable
Where:
- Net Credit Sales = Credit sales minus sales returns and allowances, when applicable
- Average Accounts Receivable = (Beginning Accounts Receivable + Ending Accounts Receivable) ÷ 2
The resulting figure is expressed as a turnover ratio, such as 5 times, 8 times, or 12 times per year.
What Does an Accounts Receivable Turnover Calculator Calculate?
The calculator generally requires three main figures:
- Net Credit Sales
- Beginning Accounts Receivable
- Ending Accounts Receivable
It then calculates average accounts receivable and divides net credit sales by that average.
Average Accounts Receivable Formula
Average Accounts Receivable = (Beginning A/R + Ending A/R) ÷ 2
Accounts Receivable Turnover Formula
AR Turnover = Net Credit Sales ÷ Average A/R
For example, if a company has:
- Net credit sales = $600,000
- Beginning accounts receivable = $80,000
- Ending accounts receivable = $120,000
First calculate average accounts receivable:
($80,000 + $120,000) ÷ 2 = $100,000
Then calculate turnover:
$600,000 ÷ $100,000 = 6 times
The company's accounts receivable turnover is therefore 6 times for the period.
Step-by-Step Calculation
An Accounts Receivable Turnover Calculator follows a straightforward process.
1: Determine Net Credit Sales
The calculation should generally use credit sales, rather than total sales, because accounts receivable primarily arise from credit transactions.
If credit sales are $650,000 and sales returns and allowances are $20,000:
Net Credit Sales = $650,000 − $20,000
Net Credit Sales = $630,000
If a business does not separately report credit sales, using total sales may produce only an approximation.
2: Calculate Average Accounts Receivable
Add the beginning and ending accounts receivable balances and divide by two.
For example:
- Beginning A/R = $90,000
- Ending A/R = $110,000
Average A/R = ($90,000 + $110,000) ÷ 2
Average A/R = $100,000
3: Calculate the Turnover Ratio
Divide net credit sales by average accounts receivable:
AR Turnover = $630,000 ÷ $100,000
AR Turnover = 6.3 times
The business therefore turned over its average receivables approximately 6.3 times during the period.
What Does a Higher Accounts Receivable Turnover Mean?
A higher turnover ratio generally means that a company is collecting its receivables more frequently relative to its credit sales.
For example:
- Company A: 4 times
- Company B: 8 times
Company B's receivables are being converted through collections more frequently based on this ratio.
However, a higher ratio should not automatically be considered better in every situation. A company may have a high turnover ratio because it has very strict credit policies, for example, which could limit sales to customers who need longer payment terms.
Therefore, the ratio is most useful when compared with the company's historical results, credit terms, and industry conditions.
What Does a Lower Accounts Receivable Turnover Mean?
A lower turnover ratio generally indicates that receivables are being collected less frequently relative to credit sales.
Possible explanations can include:
- Customers are taking longer to pay.
- Credit terms are relatively generous.
- Collection procedures may need improvement.
- A larger proportion of customers may be paying late.
- The company may have experienced a significant increase in receivables.
- Certain receivables may be difficult to collect.
A low ratio does not by itself prove that customers are delinquent. It should be examined alongside aging reports, payment terms, bad-debt information, and historical results.
Accounts Receivable Turnover and Collection Period
The turnover ratio can be converted into an approximate average collection period, also known as days sales outstanding (DSO).
A common formula is:
Average Collection Period = Number of Days in Period ÷ AR Turnover
For an annual calculation:
Average Collection Period = 365 ÷ AR Turnover
Using the previous example:
365 ÷ 6.3 ≈ 57.9 days
This means the company takes approximately 58 days on average to collect its receivables, based on the turnover ratio.
Some businesses use 360 days for accounting calculations, so the result may differ slightly.
Example: Complete Calculation
Suppose a company reports the following annual figures:
- Gross credit sales = $900,000
- Sales returns and allowances = $30,000
- Beginning A/R = $120,000
- Ending A/R = $180,000
Calculate Net Credit Sales
$900,000 − $30,000 = $870,000
Calculate Average Accounts Receivable
($120,000 + $180,000) ÷ 2 = $150,000
Calculate AR Turnover
$870,000 ÷ $150,000 = 5.8 times
Calculate Average Collection Period
365 ÷ 5.8 ≈ 62.9 days
The results are therefore:
| Metric | Result |
|---|---|
| Net credit sales | $870,000 |
| Average A/R | $150,000 |
| AR turnover | 5.8 times |
| Approx. collection period | 62.9 days |
This means the company's average receivables turned over approximately 5.8 times during the year, equivalent to an average collection period of roughly 63 days.
Why Average Accounts Receivable Is Used
Using average accounts receivable instead of only the ending balance provides a better comparison between the sales generated throughout the period and the receivables held during that period.
For example, suppose a business generated substantial credit sales early in the year but had a much larger receivables balance at year-end. Using only the ending balance could distort the relationship between sales and receivables.
The standard calculation therefore uses:
Average A/R = (Beginning A/R + Ending A/R) ÷ 2
For businesses with substantial seasonal fluctuations, however, a simple two-point average may not fully represent the receivables outstanding throughout the year. Monthly or quarterly average balances can provide a more representative measure.
Accounts Receivable Turnover for Different Periods
The calculation can be performed for different periods, provided the sales and receivables figures correspond to the same period.
Annual
Use annual net credit sales and beginning/end-of-year receivables.
Quarterly
Use credit sales for the quarter and the corresponding beginning and ending receivables.
Monthly
Use monthly credit sales and the beginning and ending receivables for that month.
When calculating a collection period, make sure the number of days corresponds to the period being analyzed.
Accounts Receivable Turnover vs Total Asset Turnover
These ratios measure different aspects of business activity.
Accounts Receivable Turnover focuses specifically on the collection of credit sales:
Net Credit Sales ÷ Average A/R
Total Asset Turnover measures how efficiently a company uses its overall asset base to generate sales:
Net Sales ÷ Average Total Assets
Therefore, AR turnover is specifically useful for analyzing receivables and customer collections, while total asset turnover provides a broader measure of asset utilization.
Accounts Receivable Turnover vs Inventory Turnover
These ratios also measure different operating activities.
Accounts Receivable Turnover measures how frequently receivables are collected.
Inventory Turnover measures how frequently inventory is sold and replaced.
A business can have high inventory turnover but low receivables turnover, or the reverse, depending on its sales and payment policies.
Factors That Can Affect the Ratio
Several business decisions and operating conditions can change accounts receivable turnover.
Credit Policy
A company offering customers longer payment terms may have a lower turnover ratio because receivables remain outstanding for longer.
Collection Procedures
Effective invoicing and collection processes can reduce the time customers take to pay.
Customer Mix
A business selling primarily to large customers with negotiated payment terms may have a different turnover ratio from a business receiving payment quickly from individual customers.
Seasonal Sales
Seasonal businesses may experience significant fluctuations in both credit sales and receivables.
Bad Debts
Uncollectible receivables can affect the usefulness of the ratio, particularly if receivables remain on the books even though they are unlikely to be collected.
Changes in Sales
Rapid growth in credit sales can increase accounts receivable even when the collection process is operating normally.
How to Use an Accounts Receivable Turnover Calculator
To calculate the ratio accurately:
- Enter the net credit sales for the selected period.
- Enter beginning accounts receivable.
- Enter ending accounts receivable.
- Calculate average accounts receivable.
- Divide net credit sales by average accounts receivable.
- Use the turnover ratio to calculate the approximate collection period if needed.
- Compare the result with previous periods, credit terms, and relevant industry information.