Optimizing your accounts receivable turnover rate is the key to boosting cash flow. How do you maintain a high accounts receivable turnover ratio?Ī good cash flow management strategy is crucial to monitoring your current cash position and will ensure that you maintain the high accounts receivable turnover ratio you need to solidify successful debt collection and overall creditworthiness. This ratio is often measured in times per annum and can also be used to assess a company's creditworthiness. The higher the accounts receivable turnover ratio, the more efficiently the organization collects past due debts. If the credit terms are too generous, it can impact the company’s cash flow and profitability. It also depends on how quickly new sales are being made. The accounts receivable turnover does not simply measure how efficiently a business collects its outstanding debts. However, the accounts receivable turnover ratio interpretation is not as straightforward as one might think. This ratio tells how many times an organization can get its outstanding invoices paid off in one year. In accounting, the accounts receivable turnover ratio measures how well a company manages its credit risk from its customers. This way, businesses can more accurately plan for future optimized cash flows, make better payroll, improve their credit management, and inventory management decisions. This allows the company to make it through a full year of billing cycles while maintaining its profit. The "360-day" calculation is designed to decrease the company's receivable turnover time by ending the process at 360 days. However, there isn't that much of a difference. Receivable turnover in days = 365 / Receivable turnover ratio Essentially, this is the number of days from when a customer's invoice was delivered to them until paid in full. A "360-day" calculation is one way of calculating receivable turnover time. Accounts receivable turnover in days calculation exampleĪ business can decrease its receivable turnover time by using a "360-day" calculation instead. Thus, 9.2 is this business’s accounts receivable turnover ratio. Suppose this hypothetical company's net credit sales are $5,000,000.ĭivide this number by the net accounts receivable value to determine the accounts receivable turnover ratio. Next, take the net credit sales for the accounting period and divide it by the net accounts receivable balance to determine the ratio. The beginning accounts receivable balance within a single accounting period is $500,000, and the ending balance is $585,000. Suppose a company's accounts receivable (AR) collection period is monthly. The accounts receivable turnover ratio is a financial ratio that measures the number of times a company's accounts receivable (AR) are collected in one accounting period.Ĭheck out a real-world example of how you can calculate accounts receivable turnover below: Accounts receivable turnover calculation example A high ratio also means that the receivables are more likely to be paid in full. The higher the account receivables turnover ratio, the faster a company converts credit to cash.
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