Accounts Receivable Turnover is an accounting measure that tries to evaluate a company's effectiveness in giving credits as well as in collecting its money from debtors. Accounts Receivable can be seen as interest-free loans to clients, which will rarely provide any benefits to the selling company. Nevertheless, credits can be seen as a service provided customers, who may often be attracted by generous credits.
The formula for the
Accounts Receivable Turnover Ratio is:
Accounts Receivable Turnover = Net Credit Sales / Average Accounts Receivable
Seen from the selling company's perspective, a high turnover ratio is often an advantage. A high turnover ratio means that a company is efficient in giving credits and collecting money. Companies having a high accounts receivable turnover ratio will have a better opportunity of paying its own debts, and maintain liquidity that may finance new investments and purchases.
A low ratio implies that the company should start to assess its policies for giving credit, so that the company can ensure a timely collection of credit.
Companies often struggle to find the right balance between offering credit services to their customers and getting paid quickly. However, it is very important for many companies to keep liquidity in mind, so that the company can effectively honor its own obligations and make investments.