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Accounts Receivable Turnover is a measure of the net sales for a fiscal reporting period and the average balance in accounts receivable. Accounts receivable turnover is a good indication of the average time needed to convert receivables into cash. In this calculation, it is best to attempt to use a monthly average of receivables, and only sales on credit terms should be included in the net sales figure.
The calculation of accounts receivable turnover is:
Net Sales on Credit / Average Receivables
The accounts receivable turnover can then be converted to a value expressed in terms of days. This value should be close to the credit terms the company gives its customers. For example, let's assume the accounts receivable turnover is determined to be 11.0 times. If the number of days in a year is divided by this value, it will give the average age of receivables in days. In this example we calculate the value by using 365 / 11.0 = 33 days. This would compare favorably for a company that had payment terms on credit of 30 days. |
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